Re could touch 60 against USD; investors wary of India: DBS

Arvind Narayanan, head of sales, treasury & markets in DBS Bank says with US non-farm payroll numbers coming in strong, and the dollar strengthening, investing in the US market seems more attractive at this point in time.

Also read: USD at Rs 60? Why govt should let the rupee fall

Talking to CNBC-TV18, he says the weakness in the rupee will continue, and the currency could touch 60 against the USD, with India's persistently large current account deficit (CAD) and the US unleashing some small signs of recovery. There will be more demand for dollars at least in the short-term, he says. 

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

Q: What is the sense you are getting after the non-farm payroll numbers came in strong? We did see US 10-year yields rise further to 2.17 percent at close on Friday. Do you think there will be more pullout of emerging market debt, more pressure on currencies like the rupee?

A: I think clearly there is going to be short-term pressure on those markets that you mentioned.

The market is generally re-adjusting to this idea of when the Fed may start to taper Quantitative Easing (QE) and even though we do not necessary think it will be as soon as maybe some of the market is thinking, it is certainly having a role to play in terms of how Asian currencies are performing.

We are all going to see a little bit more demand for dollars across the region, at least in the short-term, and then maybe further down the line we think there could be a chance for Asian currencies to be a little bit better. Certainly for the time being, we would not want to stand in the way of dollar strength.

Q: In the near-term, do you expect the divergence in the developed markets - emerging markets trade to widen?

A: I think in terms of the currency perspective, we would certainly expect EM currencies to come under a little bit more pressure in the short-term versus DM currencies.

What is quite interesting is there are still very strong growth dynamics across EMs compared to overseeing in many DMs. That has already been factored in the past.

So the market is just re-adjusting to the expectations that EM is not quite pulling head as fast as maybe people had hoped and the US in particular is going to unleash some small signs of recovery.

Q: Are you looking at some levels in the rupee where you think that the selling is enough and done with when it would start becoming positive to enter?

A: It is very difficult to name specific levels just simply because the pressure for the time being is still so strong, and in terms of the demand for dollars in India we are still seeing a relatively large Current Account Deficit (CAD) come into the play.

So there is still going to be a demand for dollars. In the short-term, the market is going to be looking at the big figures like 58. If we break there we potentially could even move higher towards 59, and there are some people who are looking to go up to the 60 level.

We are not really that bearish for the time being, but we do certainly think we can see a little bit more upside in dollar India for the short term.

Q: One of the things that most experts have highlighted is that Foreign Institutional Investors (FII) have sold a significant amount in the Indian debt market just in the last few days which has resulted in the Indian rupee weakness. Is that a trend that you are spotting even in the other Asian markets - FIIs pulling out significantly from the debt market? Any kind of figures or statistics that you have?

A: We are certainly seeing some kind of a normalisation. I would not necessarily say we are seeing huge exits from funds, but certainly we are seeing more hedging of underlying positions.

That is one thing that has helped to drive dollar Asia higher and is creating bit more of a demand for dollars in the region. If you look across the year-to-date flows for Asia in terms of their markets they are still pretty positive. Obviously in the last few weeks you are seeing some outflows from certain markets, but it is a combination of some outflows and some hedging which is helping to drive dollar Asia higher.

Q: What is your sense about QE itself? Do you think the talk will get heightened? We did not notice so much after the jobs data came in better than expected.

A: Our core view for QE, our US economists are still thinking that we will not see any change in the size for the about next six months. Potentially in December we might start to see a slight tapering off of QE. The point is from our perspective that is still an easing stance. It is just easing at a slightly slower pace.

So I do not think we are seeing a huge shift from the QE expectations from our side and we certainly do not see any major change happening for at least six months.