Rupee may not breach 55.46-55.50 in near-term: UBS AG

The rupee has been very volatile over the last few sessions. In an interview to CNBC-TV18, Ashish Vaidya, UBS AG says in the short-term, rupee may not breach 55.46-55.50. "We will have to wait for the winter session of parliament. There is also expectation on GAAR. So, there could be some positive vibes," he adds.

Below is the edited script of his interview with CNBC-TV18’s Mitali Mukherjee and Sonia Shenoy. Q: We have seen some weaknesses again for the rupee, what are you putting it down to? What kind of downside are traders talking about? A: In the short-term, rupee may not breach 55.46-55.50. We will have to wait for the winter session of parliament. There is also expectation on GAAR. So, there could be some positive vibes. Q: For a while, it seemed like the worst is behind the rupee. But this trend of weakness is back. What kind of year-end targets are you guys talking about? Even if there is a bout of relief, what kind of working range do you have going on the rupee? A: Right now, the cap is somewhere around 55.46 to 55.50. What goes through in the winter session of parliament is extremely important. That will decide whether we can do something constructive to address the negative current account. Recent studies, in the RBI, have indicated that a 2.4-2.8 current account is sustainable, assuming that the GDP grows by 6-8 percent in real terms and the inflation remains at 5 percent and we see the offshore flows at expected levels. However, right now, we are at a shade below 4 percent of GDP. That is quite negative. We are facing a problem of twin deficit. That adds pressure to the rupee. Q: If things do not go according to plan at the winter session of parliament, how much of a detrimental effect do you think it will have on the bond market in terms of its impacts on yields? A: I think, on the bond markets, it is important to watch what the winter session of parliament does. If we get some sort of disinvestment, we get some sort of control on the expenditure and we see the overshoot not being more than 5.3-5.5 range. I think the market will be reasonably well behaved. Q: There is a small minority out there that is saying any rate cut by the RBI in December will be seen as a positive surprise. Is that wishful thinking or do you guys think that there is a chance of some rate action that comes in as early as December? A: I am a little doubtful myself on the rate cut in December simply because we have not addressed the problem of large current account and a large fiscal deficit. Infact, that had been noted in the previous policy that these also need to fall into place. I completely agree on the fact that inflation is tapering off. I also believe that inflation will be moving lower going ahead. But given the fact that the twin deficit will play its own role in a long-term management of inflation, I think we should see a rate cuts only post this and post basically January, when we see some action and we see exactly how the macroeconomics in the local context is panning out. Q: What are the bond market expectations at this point for December, no rate cut and no CRR cut or are they expecting some action on the CRR side but rates will remain steady? A: I think the bond markets clearly will have a tendency to factor in a rate cut as we go towards the December policy. So, though the fact that I may not think that the rate cut is there and the market will surely sort of priced in, atleast will give a probability of 30-40 percent, given the fact that inflation has moderated to 7.5. I know it is not a big deal, but at the same time market is still going to give it a probability. Having said that, I think the near-term range, which we should be looking at till the policy and obviously assuming nothing goes wrong in a winter session of parliament, we should look at a range of about 8.17-8.15 percent to 8.25 percent range.