Rupee looks undervalued, will touch 61/$: Credit Agricole

Mitul Kotecha, global head of currency strategy, Credit Agricole says it may be difficult to prevent further slippage in the rupee as there is a global environment of risk aversion and uncertainty about Fed QE2 tapering.

Talking to CNBC-TV18, he says that the rupee charts suggest that the currency is already looking undervalued, and when it touches the 60-61 level, it would be a pretty cheap to hold. He says that though there is speculation today regarding the sale of dollars by PSU banks, is not something that has been confirmed.

Below are the edited excerpts of his interview with CNBC-TV18

Q: The rupee has seen significant intraday appreciation, recovering from the lows. We heard the chief economic advisor point out that all steps necessary will be taken to curb the depreciation. Sources tell us that perhaps the Reserve Bank of India (RBI) might go ahead and issue non-resident Indian (NRI) bonds as well. It is reminiscent of what we saw in 1998 with the Resurgent India Bonds (RIB), and even in 2001. What is your view on what the next step will be from both the government as well as the RBI, in order to stem the collapse in the rupee?

A: I think there is definitely a sense of trying to maintain or improve confidence in the currency, whatever in the NRI bonds will help. You will have to bear in mind that we are in an environment of elevated risk aversion. It is not just the rupee suffering.

We have to put it into the context of other currencies as well and there are many currencies in Asia and a lot of emerging market (EM) currencies that are coming under pressure.

So, while you may see further steps from the government and the RBI, it may be difficult to prevent further slippage in the currency in an environment where you have global environment of higher risk aversion and sensitivity to higher US yield, and uncertainty about Fed tapering.

Q: One of the key points which the chief economic advisor spoke about was that maybe there could be an improvement in the current account deficit (CAD) come June, simply because the gold import data currently is indicating a betterment as opposed to May and that the May trade deficit data could be extremely weak because of the high gold imports that we have seen, something another currency strategist had pointed out sometime back also that maybe the aggravated weakness on the rupee might be seasonal in nature. Do you then think that maybe this is just related to the month of June and maybe things could get better once the trade deficit is out of the way and it improves possibly?

A: Definitely any sense of an improvement in the deficit will clearly have a positive impact.

One of the reasons why the rupee has underperformed relative to many other currencies is because India relies on capital flows to fund its external deficit, whereas many other emerging markets in Asia do not and if there is a sense of a narrowing in the trade and CAD it obviously is going to bode well over the medium-term for the rupee.

So that would be positive news if we do start to see more encouraging numbers on the trade front.

Q: At this point there is an intraday pullback that we are seeing. We are picking up some news that perhaps there has been dollar selling by PSU banks on behalf of the RBI. Are you hearing of any kind of intervention at this point?

A: It is market talk and we have not certainly seen any confirmation of this. But there is speculation that we have been hearing today about the sale of dollars. As I said this is not something that we have had confirmed yet.

Q: At what level do you think that we are going to start getting undervalued, because that is another comment which was made by the chief economic advisor on Tuesday?

A: I do think we are approaching undervalued levels. Certainly my models would suggest that the currency looks relatively cheap even at current levels.

I think the risk is of course that we could end up around 60 levels in the matter of days and weeks with the sort of pace of weakness that we have been seeing and I do believe that once we get around 60-61 it would look like a pretty cheap currency to hold.

Overall my models would suggest that it is already looking undervalued.