No, this isn't rupee's bottom, more fall likely: Macquarie

The rupee has not hit a bottom yet and is likely to depreciate further from current levels, cautions Nizam Idris of Macquarie.

The Reserve Bank of India’s (RBI) continued efforts to protect free-falling rupee doesn’t seem to be yielding desired results as the Indian currency hit a fresh life-time low on Thursday breaching 65/US dollar mark.

According to Idris, RBI’s announcement to buy bonds has confused the market and by buying bonds the central bank is subsidising outflow at a better price, so the market is still looking to sell the rupee.

Below is the edited transcript of Nizam Idris’ interview with CNBC-TV18

Q: At 65/USD what do you see as the way forward, with foreign flows becoming a scarce because of the Fed tapering, do you think the bottom maybe nowhere near for the dollar/rupee?

A: We are still seeking for a bottom. It is still not there yet unfortunately. The confusing signals from the Reserve Bank of India (RBI) did not help as well. Yesterday when the RBI announced bonds buying that confused the market because what we need is more value in the bonds through higher yields rather than lower yields. By buying those bonds, you are subsidizing outflow at a better price and where it should be for the current holders of Indian bonds. So the market is still looking to sell the rupee from here.

Q: Are levels important worth talking about at this point or do you think levels are meaningless?

A: Levels are not important in this kind of a market where people just grab whatever they can get. We need to get some stability and then market will look at value. By value in the bonds market, for example, I mean real interest rates. You would need real interest rates to be large enough for the market to think that it is worth putting the money in Indian government bonds.

Right now, if you look at the government bond yields, if you subtract the average of consumer price index (CPI) and wholesale price index (WPI) as an indication of inflation, you get a real yield of 1.5 percent. If you do the same with the US, you get a real yield 10-year treasuries minus yet inflation expectation of 2 percent, you get a real yield of 0.9 percent. So the premium in the real yield terms of the Indian bonds is 0.6 percent over the US. That is nothing and nobody is going to put your money in Indian bonds. In fact, RBI buying Indian bonds is an opportunity to get out of the Indian bonds market at a better price than what it should be given the subsidy the RBI is giving now.

Q: Are levels important worth talking about at this point or do you think levels are meaningless in a situation which has assumed some momentum and where any kind of recipe to arrest it is not visible yet?

A: Levels are not important in this kind of a market where people just grab whatever they can get. What we need for levels to become meaningful again is if we do get some stability and then market will look at value. By value in the bonds market for example, I mean real interest rates. You would need real interest rates to be large enough for the market to think that it is worth putting the money in Indian government bonds.

Right now, if you look at the government bond yields and subtract the average of consumer price index (CPI) and wholesale price index (WPI) as an indication of inflation, you get a real yield of 1.5 percent. If you do the same with the US, you get a real yield 10-year treasuries minus yet inflation expectation of 2 percent, you get a real yield of 0.9 percent.

So the premium in the real yield terms of the Indian bonds is 0.6 percent over the US. That is nothing and nobody is going to put your money in Indian bonds. In fact RBI buying Indian bonds is an opportunity to get out of the Indian bonds market at a better price than what it should be given the subsidy the RBI is giving now.