RBI steps to last till Aug; rupee won't gain more: Experts

Agam Gupta, Standard Chartered Bank expects the recent measures taken by the Reserve Bank of India (RBI) to curb falling rupee to continue till mid-August. He sees the Indian currency to be rangebound between 58-60/USD going ahead.

One would be closely watching what Ben Bernanke will say in his testimony today. “If it leads to an upmove in dollar yields back towards a 2.70 mark and if it leads to some risk off and some selloff in emerging market currencies then rupee would go towards 60/USD again,” he adds.

Meanwhile, Sajjid Chinoy of JPMorgan doesn't foresee the rupee appreciating further. He believes that the central bank is unlikely to rollback measures even if rupee stablises at current levels. "It would like to see some mean reversion, a few percent mean reversion before these measures begin to unwind," he adds.

Below is the verbatim transcript of their interview to CNBC-TV18

Q: What do you think from the way the call market has moved and the bond yields are moving? Is the market factoring in that you will have a liquidity strained situation, people borrowing at 10 quarter all through August, would you work with that premise?

Gupta: They have currently indicated that the measures are there for some weeks or may be months but not quarters and so, we expect these measures could continue between one-two months from now. It is fair to say that these measures would remain till mid-August and will keep a watch on the evolving situation and will then take a call whether they want to continue for long or not.

Q: On the back of the Reserve Bank of India (RBI) measures, all the speculative positions in the market are likely to get cleaned out or have they already been cleaned?

Gupta: Due to the various curbs introduced by the RBI in the past few weeks, the speculative positions were down to a bear minimum. The existing small speculative positions would have got cleaned out yesterday and today and therefore, speculative positions more or less are cleaned out of the market.

Q: In the absence of any speculative positions where do you see the dollar-rupee headed?

Gupta: The RBI measures are statement of intent and are pretty concerned about the excessive and rapid depreciation of the currency. They have given big signals that they are not happy with that and therefore, we can test below 59/USD and go towards 58.5/USD. See it in a range of 58-60/USD in the coming days. The caveat to that is we have to see what happens in Bernanke’s testimony today. If it leads to an up move in dollar yields back towards a 2.70 mark, if it leads to some risk of and some selloff in emerging market currencies then you would go towards 60/USD again.

Q: Where do you see the rupee settling in and are you downgrading your estimates in the gross domestic product (GDP) as well?

Chinoy: It is too premature to just look at Tuesday’s measures with an understanding of how long they may persevere for and use that to downgrade the forecast. Many GDP forecasts that have been downgraded have been done on the expectation that any further rate easing is now essentially ruled out.

We have never been in the camp that the RBI had significant space to cut rates in any case and so, we haven't downgraded our GDP forecast. You have to trade of the cost whether these measures will cause some appreciation or stabilisation of the exchange rate because a weak exchange rate in itself can have a detrimental impact on growth.

Q: What will be the triggers for RBI to pull off these measures? At the moment, we are working with a repo rate that is almost 10.25 percent. Are they looking at a rupee value, are they at a period of rupee stability? What will you watch out for to expect that the RBI will rollback at all and when do you think they will do that?

Chinoy: It is very clear from the statements of policy makers that they believe the rupee has overshot. Clearly, there are balance of payment (BOP) fundamentals and we have pointed out in the past that prima facie there is a USD 20-25 billion BOP gap this year because the current account will still be about USD 80-85 billion.

Without portfolio flows the more stable sources of financing are USD 60 billion. So where do you fill that last USD 20 billion from and that is at the heart of some of the foreign direct investment (FDI) reforms last night.

However, despite those fundamentals the rupee has overshot. So, just stabilisation at current levels will not be enough for them to roll back the measures. They would like to see some mean reversion, a few percent mean reversion and then for the rupee to stabilise at those levels before these measures begin to unwind. 

It is very classical orthodox monetary policy making, emerging markets around the world have seen this in the past, Brazil, Mexico, Turkey, Korea. I suspect with these measures you will have to buy for at least few weeks before you see a sustainable move on the rupee.

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Q: Do you think rupee will appreciate in few weeks?

Chinoy: That is the big unknown, there are two competing hypothesis here. One is that it is purely fundamental imbalance that has driven the rupee and there is another hypothesis that a lot of this is self fulfilling expectations, there is some betting against the rupee. Exporters are delaying proceeds because the cost of not doing so is not prohibitively high, importers are frontloading payments.

There is a combination of a lack of anchor and speculative positions and the only way you know whether the latter is true is to squeeze conditions to raise those to make the opportunity cost higher. So there is no guarantee the rupee will appreciate.

Q: Is the value of the rupee where it is because banks have used rupee resources borrowed from the RBI to go long on the dollar? Are you really seeing that if the government or RBI is expecting that they want a 10 percent appreciation of the rupee, a 55-56 will happen? Are they really that much of speculative positions purchased by borrowing from RBI?

Gupta: I don't think there are too many speculative positions in the market. Always there is some element of speculation in the market, but I don't think the current level of the rupee is primarily getting driven by speculation, the actual demand supply which is driving the rupee right now.

There is scope for appreciation because of the measures and we could see a level of 58.50 being traded if the Federal Reserve (Fed) chairman’s testimony tonight is going to be slightly on the neutral to dovish side. I don't see appreciation beyond 58 level.

Q: What will you do in the bond market? Will you be a buyer at 8.1, do you see that as a passing yield on the 10-year and therefore, an attractive place to buy the bonds and for the next one month what is the range?

Gupta: The current level is 8.1 on the 10-year and tomorrow we have the OMO RBI sale. The fact that the RBI has announced an open market operations (OMO) sale, the market is looking at slightly higher yields from even these levels. Levels of Rs 825-830 could be seen in the coming weeks and that would be a reasonable level to buy some bonds.

Q: When is the earliest that you are expecting a rate cut and what would be the total quantum of rate cuts in FY13 itself? When are you expecting the rollback?

Chinoy: Nobody expects the rupee to go back to 55-56. The question is, is there 2-3 percent that can be gained through squeezing out? However, unless these measures are tried for a few weeks nobody knows. I don't think that this will be rolled back at least for three-four weeks.

Given the quantum of borrowing yesterday and the fact that the effective window for borrowing is just 75000 from the LAF but 30000 more from an export refinance perspective and the fact that you frontloaded your borrowing needs for the next fortnight, it is unlikely the call rates are going to spike 10 percent in the next fortnight. So at least on that front, measures will only begin to bite after the fortnight is over.

Even the wholesale funding costs have gone up to 100 bps. So, we shouldn’t expect an immediate rollback. It will take at least several weeks, depending on how the rupee evolves in the interim period.

Q: Are you expecting a sovereign or an NRI bond anytime soon and if that happens, will that make a seminal difference to the dollar-rupee?

Chinoy: I am not expecting a sovereign bond. Policy makers are not in favor and it is the right attitude to approach. The quantum of what we will have to raise will have to be USD 10-15 billion for it to be a meaningful difference on our BOP.

In this global environment with distaste for EM assets, given the fact that Indonesia has issued about USD 3-4 billion this year and is paying 280 bps over 10 year treasuries will make a sovereign issuance pretty expensive from a dollar perspective. It will send down a sign of weakness and will be a trigger for rating agencies. So, I don't expect a sovereign bond. You will get other measures to try and increase the attractiveness of rupee denominated assets more than a dollar issuance.

Q: Are you expecting a sovereign or an NRI bond anytime soon and if that happens will that make a seminal difference to the dollar-rupee?

Gupta: Considering it has been discussed for a long time, there is a small chance of them to stabilise the currency somewhere below 59. Going forward, they could instill confidence amongst investors that we could stabilise our currency on a slightly medium term perspective.

It is when they would come out with a sovereign bond because they have said again and again that they would only announce a sovereign bond from a position of strength when they have a stable currency.  The chances of a sovereign bond are slightly more than an NRI bond.