Expect rupee around 53-52.50/$ by year-end: Deutsche Bank

The rupee fell to a near two-month low in early trade on Monday tracking losses in most other Asian currencies. Ravneet Gill, CEO, Deutsche Bank India expects the rupee to be around 53-52.50 level by the end of the year based on the measures taken by the government, which he says, the market is yet to factor in.

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There was a lot of foreign institutional investor (FII) flows in January and February but a lot of domestic investors had been selling. He says domestic investors have better sense of midcaps than the FIIs. "So, if there is no support coming from domestic investors then that creates certain amount of weakness that we have seen, the hammering that the midcap stocks have taken," said Gill in an interview to CNBC-TV18.

Below is the verbatim transcript of Ravneet Gill's interview on CNBC-TV18.

Q: Rupee has been moving at 55 now and that is an important number. Are we going to be in for a greater weakness?

A: Our house view is different, by the end of the year we should be at 53-52.50 level and that is based in terms of a lot of measures that the government has taken and the market hasn’t yet absorbed completely. So, we are not as bearish on the rupee.

Q: What is the sense you are getting from the investors post Budget? Will the cash inflow run rate that we have seen in January and even to some extent in February continue in the Indian market or are they a bit perturbed by the global scenario and even by external shocks to Indian macros as well?

A: All the discussions that we have had with investors have been positive. There is now growing recognition in terms of what the government is trying to achieve through this Budget. Some of the previous Budgets may have caught the imagination of the market a little more spectacularly than this one, but when we will look back at this Budget after few years, we will think it is a historic one.
 
It is a historic Budget because for the first time we see a convergence in the political and economic agenda of India. This means that India has embarked on the journey from becoming a political economy to an economic polity. That has some significant implications for India's economic growth going forward and that is increasing. So, the flows that we have seen in January and February are likely to strengthen going forward.

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Q: What are investors telling you about growth? What do you think about their doubts over Indian growth and Indian economy as well as valuations that discomfort by going too much on current valuations?

A: There can be two problems in an economy, one is demand side and second is supply side. If you look at India, speaking what you are really seeing is a supply side issue. Demand continues to be robust. On supply side we have been constrained and that has heightened over the last two years. However, the good thing about being supply side constrained is that you can fix it with investment. With the emphasis now on fiscal consolidation and India’s record there has been indifferent, but this time they have come up with something which is very creditable.
 
Secondly, the emphasis of the government to try and get the public sector to revive the investment sentiment will kick start this whole growth initiative. Once the public sector comes in and let us face that the public sector is sitting on a lot of investable cash, the private sector will follow. Are we saying that we will get into a stage where we will start seeing straight capitalism in India? No, I don't think we will get as far as that, but I see the government acquiring a much more central role in kick starting the investment sentiment in India then it has in the last few years. That will be a trigger from point of view of taking India back to a 6 percent growth.
 
Investors are still concerned, no doubt, but they feel good about the fact that this is really a supply side issue and can be sorted out through investment. If they look at it from a medium term perspective, every discussion that we had with investors today and previously, they do have certain concerns. They also feel constrained of what is happening at a global level but if they look at the India picture given that this is a supply side issue, they feel India is much better positioned than the rest of the globe in terms of its future growth prospects. To that extent a lot of their concerns have actually been addressed.

Q: What is your call on midcaps and how are investors viewing the carnage that we have seen in the midcap space? Today NHPC has fallen about 20 percent, it fell quite a bit on Friday as well. So these are good quality papers which are now getting hammered. How does one approach the midcap space when even good names like NHPC is taking the brunt and has fallen so much?

A: Hard to explain except for the fact that in January and February, while there were a lot of FII inflows a lot of domestic investors have been selling. It is domestic investors who have a better sense of midcaps than the FIIs. So, if there is no support coming from domestic investors then that creates certain amount of weakness that we have seen, the hammering that the midcap stocks have taken.

Are there any underlying fundamental reasons which warrants such a fall? No, it shouldn't. However, the moment the retail investor and the domestic houses start buying, you will see a recovery in the midcap space. However, we have seen through January, February and they have been net sellers by big margin. We need to reverse that trend and I am sure the government will be taking steps to correct that. As far as FIIs are concerned, do they see any fundamental economic concern which has led to this carnage? No. We are seeing the Sensex go up 22500 and we believe that is the level that will hit.

Q: Where do you think the yields are headed and what is your view on the Reserve Bank (RBI) itself? After such a steep cut or at least announced in the fiscal deficit it is traditional for the RBI statement post the Budget to say it gives them maneuverability on policy. What do you think the RBI will do and where do you see yields in the next six months?

A: The government having delivered its promise in terms of the fiscal deficit provides a much stable platform for RBI to show flexibility. During the rest of the year, we will see rate cut of about 75 bps. The rate cut will impact the yield curve as well, being the direction in terms of the RBI’s monetary policy through the balance of 2013. Hard to take a call in terms of next quarter, the next 12 months that is FY13, over that we see a decline of about 75 bps from monetary policy perspective.