Is the rupee depreciation growth positive? Experts debate

The rupee hit a record low against the dollar for a second consecutive session on Friday to approach the psychological 57 mark, hurt by dollar demand from oil firms and gold importers, as well the broad risk-off sentiment.

"We have seen some exporter interest begin to emerge from about 56.50 yesterday and again at about 56.80 this morning. But it is still small and tentative. There is little bit of export hedging and then clients would prefer to still watch and see how it is going. So that’s the kind of action that we have seen," Pradeep Khanna, MD & Head of Forex Trading, HSBC India told CNBC-TV18.
Traders did not spot intervention from the Reserve Bank of India so far, but most expect the central bank to step up dollar sales if the rupee ventures close to the 57 mark.
The RBI was suspected to have sold dollars on Thursday, though the actions were described by traders as "mild."
“If they (RBI) are buying we will just take it as a proxy for oil demand,” Khanna says.
Oil companies are the largest buyers of dollars in the domestic currency market as India imports nearly two-thirds of its oil needs. Brent crude hovered below USD 90 on Friday, up slightly after previous session's steep losses, but was headed for it biggest weekly loss in about a year as bleak data from top consumers United States and China muddied the outlook for demand.
Fundamentally, lower crude should make a big difference, says Khanna. “I think USD 10 fall is USD 10 billion on the import bill. So if we are talking about a large funding gap, that gap is going down. If the situation continues, it could fall further," he says 
At some point in time, Khanna says, if the currency is guided and is allowed to find its own level, exporters who today are hedging extremely defensively, would at least start to have a view that the forward premium is attractive and the currency may not weaken beyond what the premium is already reflecting and may then up hedging ratios. That is what would then make the currency on its own begin to trade in a more balanced fashion,
The past couple of sessions have resembled developments in May, when the rupee tumbled to a string of record lows, as renewed global risk aversion exposed India's fiscal and economic challenges.
Slowing policy reforms by a government facing faltering economic growth as well as current account and budget deficits has added to the rupee declines. The currency has depreciated 28% since April 2011 and 12.4% since April 2012.
The Sensex was down 0.5%. The US dollar was hovering near a one-week high against a basket of major currencies, after Moody's Investors Service downgraded 15 of the world's biggest banks.
Next up, the rupee may find support at 57-57.20 levels in the expectation of RBI doing something, says Vivek Rajpal, Rates Strategist, Nomura India. Below is an edited transcript of their interview to CNBC-TV18. Watch the accompanying video for more. Q: What’s causing this capitulation? Who are the buyers? What exactly is happening in terms of buyers and sellers in the market today? Khanna: It’s been pretty much business as usual. I think oil companies are buying dollars which looks like a pretty normal action. We saw some exporter interest begin to emerge from about 56.50 yesterday and again at about 56.80 this morning. But it is still small and tentative. There is a little bit of export hedging. Clients would prefer to still watch and see how it is going. Q: And the RBI today? Khanna: If anything, I think just smoothing the flow kind of small intervention. I don’t think anything large. Q: There are press reports which suggested that the RBI asked OMCs to buy 50% of their requirement through a single PSU bank. Do you think that creates any kind of material impact and restricts the downside? Khanna: It’s an interesting point. It could just have the impact that business is routed through one bank and therefore is not as widely known as would happen if the process was comparative bidding. So the demand still remains. The difference really is that it’s just not advertised as much. However, the market will soon start to focus on a couple of large public sector banks and if they are buying we will just take it as a proxy for oil demand. Obviously you never really know how much there is and when they finish buying. Q: Today foreign banks were telling us that oil companies have been inquiring with them? Khanna: Yes, but even the letter that we are discussing does not say that they have to route 100% of their business through any one bank and that they cannot do any part of their business in a competitive manner. Also the letter seems to suggest that the oil companies are going to take a view from the Petroleum Ministry. I am not really sure as to what extent which if the oil companies have, put it into practice. Q: What is your sense in terms of a possible support level? Does the rupee start winding some kind of support at 57? Rajpal: Yes. At 57 we expect the rupee to find some support. Probably 57-57.20 are the levels where we will find the rupee holding those levels in the expectation of the RBI doing something. Given its sharp move, once it is breached 5,640, probably more advertising of the current measure or even increasing or enhancing this measure can be one of the things which the market can expect.
_PAGEBREAK_ Q: Is it possible that we have extended ourselves slightly on the downside on the rupee and in the case of a slight risk aversion? Even if risk currencies fall further from here we may slightly outperform because we have already over extended ourselves, is that possible? Rajpal: At the moment it looks like we are underperformers so yes if something very idiosyncratic measures come from RBI we can out perform for a very small timeframe but overall big outperformance versus global markets looks difficult. Q: What about the crude price fall which is not really reflecting much on the rupee. Do you think that at some point will begin to kick in? At what price levels do you think we could start beginning to outperform because the macros improve? Rajpal: It’s a little ironical but generally the currency depreciating and crude fall occurs at a similar point of time and the lower crude price impact tends to show its impact only two-three months down the line. However, I would say a lower crude price with a diesel price hike kind of a measure which may come post presidential elections or if earlier will be really good. Those are the things which can lead to some kind of a support. Q: The entire fall in crude at least to some extent is getting reflected in the stock markets because it shows some resilience but you are not getting any benefit in the rupee. Is there any reason why this would be happening? Rajpal: That’s a very fair point. The correlation between equities; rates and currencies at the moment are very weak. Every market is behaving on its own flows, every market is responding to its own flows. So, yes, crude price fall should get reflected at some point of time in the rupee but looking at equities and expecting outperformance directly in currencies is something in the lack of correlation is a little difficult at the moment. Q: One statement that has been mentioned in the market is the last speech of the Reserve Bank governor as well as the monetary policy statement which almost indicated that the rupee deprecation is growth positive. That was one of the stance he took and perhaps that loosened the fear that RBI will come with any ferocity. Is that the case at all? Something to do with the stance that maybe there won’t be a very ferocious support of the rupee? Khanna: It’s a possibility. Definitely I do feel that RBI intervention has reduced post the monetary policy. But if one actually reads everything that the RBI says on their currency policy, they have to walk a fine line between allowing the market to find its own level, not try to artificially prop up the currency and also manage expectations and ensure that the price action is not exceedingly one-way.
Fundamentally, lower crude should make a big difference. The USD 10 fall is USD 10 billion on the import bill. If we are talking about a large funding gap, that gap is going down. If the situation continues, it could fall further. At some point in time if the currency is guided and is allowed to find its own level, exporters who today are hedging extremely defensively would at least start to have a view that the forward premium is attractive and that the currency may not weaken beyond what the premium is already reflecting and may then up hedging ratios. That is what would then make the currency on its own begin to trade in a more balanced fashion. Q: You said that exporter interest had emerged at about 56.60 thereabouts. What’s your hunch? Is there much more downside to come? Khanna: We are seeing tentative exporter interest at this point. Unfortunately now after the FOMC we are seeing dollar strength across almost all currencies, more against some, less against others, but overall the dollar has been trading strong. Clearly, exporters will wait out and continue to watch because it’s just a day after the FOMC so far. They will watch for at least two-three days to see how it’s going. But we do begin to see tentative signs of some incremental exporter interest. Q: There has also been a fairly decent rally in the bond markets understandably because of this 30% fall in global crude prices, does the yield now go below 8%, 8.03% its not a long stretch? Rajpal: Yes it can easily go below 8% however tactically at the moment bonds are also getting support from open market operations. In July the liquidity conditions are supposed to improve again. So there may be a phase in July when the RBI may take a pause from open market operations so as a tactical play we may see 10-15 basis points of an uptake.
However, given that the market continues to expect monetary easing primarily on the back of crude price fall, with the derivatives market also suggesting the same, I would expect bonds to revisit these low yield levels and probably break the 8% yield level near the next monetary policy which is on July 31. Q: For the next week too there is an expectation that the government expenditure for April-June will start picking up towards the last fortnight of this quarter. Could that mean for the next week we could trade below expectations? Rajpal: Next week I have expectations that we will see open market operations (OMO), because it’s the last week of June and maybe the MIBOR fixings will only come down in the first week of July. So next week we may have OMOs which may continue to support bond yields, but it will be interesting to see how bond yields react in July when liquidity conditions improve.