Lighter tapering may appreciate rupee to 61.5/$: StanChart

Agam Gupta of Standard Chartered Bank believes rupee may appreciate to 61.5 against the dollar if the Fed tapering is on the lighter side. "If tapering meets the expectation of being lighter than what was previously expected, rupee can continue to consolidate with a slight chance of appreciation from here," he says in an interview to CNBC-TV18.

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With Regards to the Reserve Bank of India (RBI) policy on September 20, he says the central bank had cut operative rates on July 15 to stabilise the currency, unless that happens, RBI will maintain a status quo. "Going forward once the currency stabilises, they will start rolling back the special measures in a calibrated way. I do not think they will do in this policy but probably in the coming policies," he adds.
Giving his view on the consumer price index (CPI) today, Gupta believes if the number is somewhere around 9.5 percent, then it will not impact the market since it is already priced in, but anything closer or above 10 percent will lead to a negative impact. Below is the verbatim transcript of Agam Gupta's interview on CNBC-TV18 Q: What do you think of rupee at 63.05/USD, there was support for the dollar yesterday, today at 62.90/USD we see support for the dollar, will rupee face trouble appreciating above 63/USD?
A: The moment we see a bit of consolidation, the big move from 68/USD to 63/USD happened and definitely some interest is seen from importers to buy close to 63/USD. Further move from here will happen once the Federal Open Market Committee (FOMC) is out of the way and if the taper is on the lighter side then we can see a move to 61.5/USD. Q: What is your sense about foreign institutional investors (FII) movements? We saw strong buying up until yesterday, stock market numbers indicate continued buying of about USD 100 million of stocks, what do you think will they do today?
A: We have seen strong data from the FIIs on the equity side. On the debt side it’s been pretty flat. Today, as of now, we have not seen much activity from them with the stock market slightly down, it will be a small number on either side. Q: We have seen a bit of outperformance of rupee compared to some other emerging markets (EM); is the emerging market currency phenomena sustainable? Do you think this recovery in EM currencies will continue and can the rupee then continue to outperform?
A: The EM rally in the currency has happened from the time the non-farm payroll (NFP) data has come out and it has been quite a significant rally. We will consolidate from here up till the FOMC and it remains a big event, so what happens in the FOMC will determine.
The market is discounting a taper which is on the lighter side than what was expected till a couple of weeks ago. If tapering meets the expectation of being lighter than what was previously expected, we can continue to consolidate with a slight chance of appreciation from here. Q: Do we now have an established floor around 68/USD on the currency regardless of the tapering and is there any bad news that may hit us?
A: Those levels will not be seen in the immediate future because the measures that have been introduced in India like the RBI taking the oil demand out of the market for some time and the effect of the non-resident Indian (NRI) changes on the foreign currency non-resident (banks) FCNR (B) regulations and also the fact that tier I capital has moved from 50 to 100. The impact of these two measures is yet to be seen. It will be seen in the coming weeks and it will lead to some significant reserves accretion. Q: What about the capital flow after RBI measures? If tapering number is USD 10 billion as the market is factoring in, what would you give the rupee on the upside?
A: Apart from the tapering number we have to see what they say in the statement and what they say about the forward guidance for interest rate hikes, when and if they happen in 2015 or 2016. So, there is a chance that they make the interest rate guidance more dovish if they think that economy is still fragile.
Also, the flows have not happened till now. On the FCNR (B) side we expect something like USD 7-10 billion coming in and also the increase in tier I capital should see another USD 7-8 billion coming in from there. So, there is a good chance of the reserves going up by USD 15 billion in the next two months. Q: What would you expect from Rajan on September 20, any easing of the cash reserve ratio (CRR) or repo rates?
A: They changed the operative rate from 7.25 percent to 10.25 percent on July 15 and have kept it there till now. The aim of changing the operative rate was to defend and stabilise the currency.
The currency is still moving around and not stable per se. So, in this policy they will keep it status quo but going forward once the currency stabilises, they will start rolling back the special measures in a calibrated way. I do not think they will do in this policy but probably in the coming policies. Q: If the CPI number today comes in at 9.6 percent, do you think market could get bearish; do you think that will impact the rupee and bonds tomorrow?
A: I do not think so. Around 9.5 percent is built into the market so just the CPI number will not have any impact on market. If it is away from expectation then it can have an impact on the market. So, anything closer to 10 percent or above 10 percent will have a negative impact on market but 9.5-9.6 should not have any impact on market.