DBS Bank remains bearish on rupee, sees support at 59/$

Fears of US Fed tapering off quantitative easing (QE) led to a sharp fall in the Indian currency on Tuesday, however it is likely to find support at 59/USD, says Arvind Narayanan, Head of Sales, Treasury & Markets, DBS Bank. The rupee closed at a new high of 58.78/USD yesterday.

If the Fed is hawkish and hints at continuing the stimulus, then the rupee is likely to strengthen by at least 60-80 paise from the current level, he told CNBC-TV18 in an interview. From a medium term perspective, Narayanan is fairly bearish on the rupee and expects the weakness to continue for some more time. Below is the edited transcript of Arvind Narayanan’s interview with CNBC-TV18 Q: Yesterday was quite a jolt. Do you think the rupee is going to take out 59? A: In the immediate term, 59 would be protected. What’s playing on the market’s mind is the Federal Open Market Committee (FOMC) minutes which are expected later this evening. So, there would be a bit of position squaring today and 59 would be protected. Remember, the last time rupee flirted with 59, we saw a lot of selling and protection coming at those levels. So, we would kind of be safe at these levels. Q: What has led to this latest bout of weakening because the rupee had strengthened and global markets have been quite steady leading up to the FOMC? What led to that 75 percent slide yesterday again? A: Yesterday again, markets have been spooked by a lot of news coming in about quantitative easing (QE) tapering again. Given that the FOMC is happening now, the worry was exaggerated by the fact that if market does get an announcement of money being pulled out or QE tapering happening, the reaction it would have on the market is something which is honestly unknown. Nobody knows whether it is going to be a knee jerk reaction or is it going to be a very smooth pullout from the market. So by and large, emerging markets would face a bit of crisis of confidence until we get more clarity on what’s expected and that we should know later tonight. Q: Assuming things go the markets way which is that there is an extension of the buying program, there is no talk of liquidity easing right yet. How much of a reaction do you think we could see in the currency? What kind of pullback are traders talking about? A: If the FOMC’s tone is hawkish and there is no talk about QE pullback happening then definitely you could see rupee strengthening by at least 60-80 paise from here. My sense is there would be some talk about slowing down of bond purchases by the Fed. There could be some talks about plans being made to reduce liquidity and pulling it back. The markets would kind of hold it at these levels. One wouldn’t see a very strong pullback in the rupee. In fact, in the medium term, I am fairly bearish on the rupee. I still think that there is some rupee weakness left in the market and this would wait for the news to digest before the next move is decided. Q: Anecdotally, what do you hear about technicals though, in terms of whether there is still a lot of equity outflows and debt outflows happening. There was the expectation of some bunched up inflows, when is that expected? A: The big inflow is the Hindustan Unilever (HUL) flow which is expected in July. Total size of that is about USD 5 billion of which maybe USD 1-1.5 billion has already come in. In terms of outflows, we see equities have had a minimal outflow, about maybe USD 0.5 billion or so. Debt is the one which has bled quite a bit, about USD 4-4.5 billion or so. My sense is there is still some more outflow left on both, equity and debt side. HUL is of course the function of the market. We don’t really know how much of the open offer will be taken up because the offer price is very close to where the market is today so there is not much of an attraction for the existing shareholder to give up his shares. So by and large, fundamentally, the flow looks negative for the rupee. I am worried about oil here. Oil is already at USD 106 per barrel. Current account deficit has not exactly strengthened over the last few months. By and large, the fundamental situation does look very weak. Unless we get some very strong reforms, not just verbal interventions but also announcements being made, market would wait and watch and at the slightest hint would try and take the dollar rupee higher.