Fall in CAD may keep rupee in 61-62/$ zone: Indranil Pan

With India’s trade deficit falling to USD 6.76 billion from USD 17.15 billion a year ago, the current account deficit is likely to contract says Indranil Pan, chief economist, Kotak Mahindra Bank. According to him, the reduction in current deficit will lead rupee to its fair value at around 61-62 against the dollar rather than 63-64/USD as projected earlier.

However, Pan says if the US budget issues, debt ceiling issues are not resolved on time, there can be a significant downside reaction on the global economy.
In worst case scenario, the downside on the rupee will be around 63-64/USD, he adds. Below is the verbatim transcript of Indranil Pan’s interview on CNBC-TV18 Q: Do you agree that the market is not fully factored in a big decrease in the current account deficit at the end of the year, almost down to USD 48-50 billion versus the earlier estimated USD 70 billion?
A: In terms of our own understanding we would be putting USD 60-61 billion negative on the current account deficit (CAD) which works out to be about 3.4 percent of the proportion of GDP. The whole global dynamics – the way it is moving, I think the bigger issue and the risk is financing this current account gap. 
Given the fact that somewhere from today till the end of March 2014, we will possibly see QE taper, we would possibly have to fight with election related issues, fiscal issues in the economy. Overall, even though the current account balances are becoming much better than even what the government thinks, I think the financing challenges would possibly continue. Q: Did the rupee market react wrongly purely on sentiment when the underlying data should have told us otherwise?
A: When it was moving towards the 65-68/USD, the total dimensions of the issue where different. The global markets as well as emerging market sentiments were absolutely certain that the taper will happen in September. The only issue to be discussed was whether it was USD 5 billion taper or a USD 10 billion taper or a USD 15 billion taper. That is one of the reason why the domestic monetary policy was also shifted out and because the taper did not happen Rajan got that much more courage in terms of reducing the MSF rate and looking at the reduced volatility in the currency market.
When the overshoots on the currency markets happen, it definitely happens in a very big way. For a significant period of time we were anyway looking at 63 or 64 to be fair value for the rupee. It is definitely at around 61-62/USD zone.
So, given the contraction in the current account number, the fair value for the currency could be at around the 61-62/USD rather than 63-64/USD that we were probably looking at.
The point that needs to be made is the whole debate of the US - the budget issues, the debt ceiling issues. If we have a certain date in mind by which the solutions don’t come through, there can be a significant downside reaction on the global economy — the financial markets globally and its repercussions. Q: Even if there is a downside and we are not saying everything is hunky dory, do you think that downside today is far more limited given what we have seen with the CAD, given what your projections are as opposed to the nervousness we saw in the rupee market a month and half, two months ago? Are we no longer talking 67-70/USD, but 63-64 as the downside?
A: Definitely yes. At worst case we are more talking about 63-64/USD. But we to a certain extent are yet not fully factoring in the issues related to the QE nervousne