Don't see rupee at 60/$; no rate cut in June: Dron Cap

All emerging market (EM) currencies are depreciating against the dollar, so the precipitous fall in the rupee is not an India specific issue, said Pathik Gandotra, Partner, Dron Capital in an interview to CNBC-TV18.

Federal Reserve's (Fed) comments on tapering liquidity triggered this fall in emerging market currency. However, in the near-term, Gandotra does not expect Fed to start tapering soon. Therefore, the emerging market currencies could also see a pullback. He does not see the rupee depreciating to the level of 60/USD.

Falling rupee has also dashed rate cut hopes, at least in the June policy review of the RBI. Gandotra reminds that banks have not transmitted previous three rate cuts on to customers. However, one can expect interest rate reduction of about 75 bps more in this calendar year, he said.

Also read: India May current account deficit seen rising to $21 bn

Below is the verbatim transcript of his interview on CNBC-TV18

Q: How worried are you about the way the rupee has moved and what kind of damage it might be doing to our recovering macro?

A: Obviously the rupee fall is worrying but the silver lining is that it is falling in line with all the emerging market currencies and not in isolation. So if it were falling because of an India specific issue, I would be more worried. Now that it is an emerging market issue the worry is a bit tempered. All this started because of the Federal Reserve (Fed) deciding to taper with some initial comments. I don't think Fed will be so soon in tapering its Quantitative Easing (QE) because it can be very damaging to their bond yields and their economic recovery also.

So the market actually might be surprised by the fact that there will be no dampening of QE for another six months and that might actually give you a pullback which is where all the emerging market currencies could also pullback.

So in this backdrop - since I believe the fall is temporary, I think the damage to the macro if at all will be temporary. I don't expect the rupee to continue to depreciate through the year from 58 to 60 and there onwards. If the rupee does depreciate very rapidly in the next few days then the government will do something really serious to stem the current account deficit (CAD).

Q: When the first wave of weakness came into the rupee a lot of people pointed out that this could actually be equity market positive - in the sense it impacted earnings positively but you don't think that silver lining holds any more?

A: Obviously it does impact earnings positively; technology companies, exports do well. But the point is this whole movement is very temporary in nature. I don't think it is a sustained movement and the rupee will depreciate from here on. It is not as if the rupee has found a new level at 58-59. It might depreciate through the year but in the end you will find that over the year it would have depreciated between 3-5 percent.

Q: Where does this leave companies that have a large amount of forex debt because some of those incidents showed up yesterday in the way stocks like Shree Renuka Sugars, Opto Circuits performed?

A: The point here is that this just exposes the inherent risk in the business of these companies if there is any. If there is a company which has an inherent business which is weaker and then you have a rupee fall on top of that, then the company would be hurt. However, if the inherent business is strong, then the stock will come down, it may provide a good buying opportunity and you might actually buy and trade it up.

Q: How do you think the RBI is reading all these developments? Can it take that leap of faith that things are just temporary or do you think it will pause next week and then see how events move before taking another call on the next rate cut?

A: I think they are not cutting rates in June because they have already cut rates thrice in the year, the transmission has not happened at all and so their cutting rates is not actually leading to lower interest rates in the economy. So they will be more focusing on getting transmission into the economy rather than cutting rates ones again. They will eventually cut rates in July. They might cut about 75 bps more this calendar year but I don't think they will cut in June because they have already cut three times.

If you recall in the last statement, the Governor had clearly said that he is looking at the monsoon for any signs of monetary easing. So, the inherent component of why RBI has been sounding hawkish while still cutting rates is the consumer price index (CPI). Now if the monsoon is good and food inflation moderates significantly, then CPI will actually collapse because WPI has already collapsed. Then you will actually see RBI’s hands much more free to unleash a wave of rate cuts through the year.

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Q: Is the market feeling a bit disappointed from news from New Delhi over the last couple of months? With so much talk has actions slowed down, is that the general perception?

A: In some ways yes and in some ways no because if you see the market is very happy with the fact that the diesel price hikes have happened on schedule. It also feels happy about the fact that the fiscal deficit has been reined what the government had said that is happening. Third, of late in May the government has actually released lot of cash advances and you are going to see government liquidity hitting the market in the next few months. So these things are generally positive.

Obviously one would have expected the parliament session to happen and so they could have taken a few more reform decisions around the Pension Bill and around the Insurance Bill which have not happened. Where, in fact serious FDI could actually have come. So that and Goods and Services Tax (GST) is a kind of disappointment.

Overall, I don't think that the market is so unhappy with the government. Our views get coloured by the huge volatility that we see in the currency or in the markets. A week 10 days back things were okay, the market was going to 6,200 and everything was good. Now, suddenly we are again talking about if there is a problem. Again in 10 days. the market goes up then again there will be no problem.

I don't think one should read too much into volatility. Over the last 12 months, the government has done a good job on the economy. It has not done the best job that it could have done but generally - containing the fiscal deficit, trying to curb gold imports, trying to see that diesel prices are hiked, passing key reform measures and finally the Cabinet Committee on Investment (CCI) (although it has not performed to its potential but at least cleared a lot of projects), they have done their bit in trying to kick start the economy in a modest way. Of course it is not ideal and they can do better.

If the question is – will things happen from here till the elections? I think thing will happen because the government has intrinsically understood that unless they get the reform momentum back on track, the stock markets getting back, economic feel good factor, they will not have a very good chance in the elections next year.

Q: So how do you translate this into a market approach then, do you preempt all this action and start getting exposure and do some of the rate sensitive sectors including capital goods etc? Do you go with the safety of defensives, how do you do this?

A: The point is that our strategy has been the same that you should stay on good franchise and defensives but try to nibble at capital goods and my theory remains the same.

If you look at the index in dollar terms it is already at the level of 5500, it is at the same level. So, the index has already hit the bottom once again, that it had hit in April. In that sense, it is kind of oversold and logically, it should start rebounding from here, or may be after a few percentage points down from here, the index should rebound.

This is the time to pick up interest rate sensitives, when they have actually been battered. The bond market is not expecting a rate cut any more. So if there is no rate cut they will not be particularly disappointed and so all your state owned banks, your leading capital goods companies are available cheap now. There is a trade in those kinds of stocks. Obviously it is risky but I would rather buy when they are falling than when they are rising.

Q: What is the fear that as we get into the next three months the market slowly starts to get the feeling that may be the CAD problem is not going to be resolved very easily as we will find out with the next monthly data which will come out? And given that under recoveries might go up now with the way the currency is going, we will probably have a situation once again where the S&P starts breathing down our back saying not enough resurrection has happened on the deficit front and that threat comes back to haunt the market.

A: The issue is whether you think this is permanent or temporary. If you think the rupee is going to be at 58-59 for the rest of the year then yes, what you are saying will actually make sense. If you think it is going to appreciate from here on and find a level between 54 to 56 then all these things don't matter.

Second, on the CAD, the economic affairs security was saying yesterday that the gold imports in June have actually collapsed, that is what has also been the feedback from the jewellery industry. It collapsed to about 40-50 tonnes from 150 tonnes which was there in May. If that actually happened then the June trade surplus will be very good.

Let us assume that nothing happens, gold imports still stay high then the government will do something really drastic to curb the CAD but they will not let the CAD go beyond a point that is our bet. It is not as if nothing can happen but the issue that if you see the CAD actually going out of control, the government would do something really drastic. For example something like banning gold imports altogether and that can be a very big step and that can then provide some comfort.