Rupee to see 58/$ again; Fed testimony benign: Geosphere

Arvind Sanger of Geosphere Capital Management sees the Indian currency heading back to 58 against the US dollar after the recent measures taken by the Reserve Bank of India (RBI) to curb the rupee's fall. Like most market experts, he is also of the view that central bank's moves are short-term in nature.

In an interview to CNBC-TV18 he says banks are getting brutalised on the back of recent measures taken by the RBI which will result in major liquidity dislocations for the bank sector for a sustained basis.

Also Read: Traders take short position when Nifty rallies: Sukhani

Meanwhile, Sanger adds that Federal Reserve chairman Ben Bernanke’s testimony on Wednesday was relatively benign and the tapering of quantitative easing will totally depend on the US economic data.

According to him, EMs including India have passed the stage of major liquidity outflows. "We have taken a bit of a respite from that absolute panic kind of a selling that we saw a couple of weeks ago and now we are more data dependent not just on the US data, but also on EMs," he adds.

Below is the verbatim transcript of Arvind Sanger's interview on CNBC-TV18 Q: After listening to Ben Bernanke do you think emerging markets (EM) will be okay for the next few weeks or do you think the pullback from the last 10 days is coming to an end?
A: The presentation of testimony to Congress was relatively benign and maybe a little bit dovish. Bernanke is trying to walk a very fine line in terms of Fed policy between wanting to taper and not taper too suddenly or completely independent of data and also wanting to assure investors that if Fed starts tapering quantitative easing (QE) does not mean that it is going to start raising interest rates right after that. So, he is trying to find a fine line and making it data dependent, making it clear that if there is any sign of weakness then the Fed would be back wrapping up its buying. So, it is a nuanced message.
The good news for EMs is that nothing is going to happen in a rush. The bad news for EMs is that it is dependent on the US economic data, not on EM economic data. If the US economy continues to show moderate improvement going forward, then tapering will happen and if EMs are not seeing their fundamentals improve at the same time then they could see some weakness, money leaving some of these countries. Therefore, at this point there is no obvious free lunch for EMs, but at the same time it does not look like the move is going to be lower very quickly.

Q: Is the outflow situation easing off for EMs since the last couple of days? Are people reading this pullback as just that or minor pullback or is there a sense of calm now for the EM space?
A: We are past the scare of, oh my god, the free liquidity is coming to end, I got to sell all EMs. We have taken a bit of a respite from that absolute panic kind of a selling that we saw a couple of weeks ago and now we are more data dependent not just on the US data, but also on EMs.
Now, it is a question of which EMs are showing fundamentals, which will cause them on a relative basis to benefit from foreign flows or fund flows starting to restart and which ones will be the source of funds. This is because I do not think there is a one-way panic money flow rushing out of all EMs.
The money flow has become a bit more balanced and maybe a bit more of a move back into EMs, a little bit risk on, but it is not a flush of liquidity that is going to drive much movement from here. So, if you were to talk about India with the Nifty getting back to the 6000 level, at this point the issue will be regarding what is this earnings season and policy bringing us.
In the last few days, RBI’s move to defend the rupee does create risk that if it has to last for more than a few weeks it could drive higher financing costs in the economy and therefore, slowdown economic recovery. So there are issues that are company specific to India that become more relevant now than in the short-term if the Fed is going to do anything dramatic which it looks like it is not.
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Q: We have seen banks getting brutalised in India. What have you made of this huge compression that banks have seen across the board and how are you approaching this carnage now?
A: It looks like banks' selloff. We have not been involved in the banks, not because we had any particular foresight but having been there and with this selloff the banks are starting to look interesting. This is because again our assumption is the measure by the RBI is temporary and not long-term in duration.
If it were for longer term, then the selloff would be justified, but we have heard everything from whether it is the statement by RBI or the follow-up statement from people in the Finance Ministry such as Raghuram Rajan. It is a temporary measure and there is other stuff coming. We saw something in the last 24 hours in terms of foreign direct investment (FDI) widening in some of the sectors. Assuming this will result in major liquidity dislocations for the bank sector for a sustained basis is what the market seems to be responding to and is a bit of an overreaction. Q: Is the cluster of stocks outperforming relative to the market, becoming lesser and lesser and what is that cluster now limited to?
A: We have liked, oil and gas, Reliance. Also, some of the other energy names have outperformed meaningfully in the last few weeks and that is based on policy by the Oil Ministry finally starting to move in a rational direction. It is one sector that continues to have tailwinds in terms of the benefit of policy action.
The consumer stocks that have become a hideout area, I would be more concerned about them in terms of the fact that the consumer slowdown that is going on is not over by any stretch of imagination. These stocks have been one of the areas where people have hidden assuming that earnings growth is somewhat more predictable and we are less confident on that, then the IT and pharma names that have benefited partly from the tailwind of a weaker currency as well as relatively good business fundamentals. Infosys reported numbers which gave some encouragement that the IT business, even the laggards like Infosys are starting to see moderate reacceleration in growth, therefore, the IT sector growth is fine. So, those sectors could face some headwind if the rupee strengthens meaningfully from here, but that is not our central case.
Our central case is that rupee trading range is likely to remain in a 58 to 61-62 band and if the RBI is successful, it goes to the stronger end of that range for the rupee which would be towards 58. Therefore, they may not have the same tailwind that they had, but the fundamentals in some of these sectors are still relatively good. Q: Do you think it is likely that for the remainder of the year the Nifty still remains trapped in the range of 5500-6200?
A: There is one major headwind still coming from global standpoint which will start tapering in September. We got the warning to shot across the bow starting a couple of months ago about the fact that tapering was likely to begin. Everything that Ben Bernanke said on Wednesday does not change the fact that tapering is likely to start in September, so that is one of the factors that will continue to have a modest headwind effect on the Indian market and will keep it in a trading range.
Trading range is the most likely outcome before the elections next year. This is because I do not see the political space existing for huge amount of policy action and for huge amount of corporate confidence to follow-up government policy action by making investment decisions which would jumpstart economic recovery in a meaningful way.
Therefore, most businessmen will wait for a post-election scenario for doing any meaningful capex investment. Then 5800-6200 trading range maybe most likely outcome. I would be surprised if we broke out of that in a meaningful way.
The downside risk of the US data getting much shaper, better, quicker than people expect and India is staying weak, the downside below 5800 if things were to develop, is a lower probability. But if the downside is more likely than market may blow through 6200 and go much higher because of the domestic situation in terms of the election looming.