Slowly revising up our dollar-rupee targets: BoA

Claudio Piron, Head of Emerging Asia Foreign Exchange and Fixed Income Strategy, Bank of America has been bullish on Indian rupee for the past year. "We have been slowly revising up our dollar-rupee targets," he said. He is looking for a range around 53-54, by the end of year, if not then end of Q2.

Also read: Why FM is hemming and hawing on rupee, gold and rates Below is the verbatim transcript of his interview to CNBC-TV18 Q: What is your opinion with regards to how exactly the Indian rupee (INR) is trading and have you all factored in a possible breach of the all time low of 57.3? A: As of yet no, but increasingly we are concerned. We all know clearly that May is a terrible month for the INR traditionally. Seasonally, the trade deficit deteriorates in May. There are three things troubling. 1) The price action. Particularly over the past week when the dollar has been softening and other Asian currencies have been strengthening the INR is sticking out like a sore thumb and the break above 57 is concerning. 2) If we are looking at the INR weakness it’s increasingly correlated with underperformance in Indian yields. That suggests a negative feedback loop. The weakness in the INR is being seen or perceived as restraining the Reserve Bank of India (RBI). The RBI is restraint in monetary policy, slowing growth. That slower growth means less capital inflows and that begets more INR weakness and the cycle goes on. 3) The inversion on the yield curve again is indicative of the fact that the market is more concerned as well about growth. So, from this perspective I think the feedback loop in the market is more of a concern. So, action needs to be taken pretty soon to try and stabilise this market. Q: What could this action look like because last year when the rupee had hit that all time low the RBI had tried to sell dollars directly to oil marketing companies (OMCs). Now there are some talks that finance ministry is asking OMCs to sort of space out their purchases of dollars etc. What do you think the RBI will do now in order to stem this kind of volatility and depreciation? A: There are couple of superficial things that can be done. 1) To come into the market and verbally suggest that they are concerned about these levels and that they are watching the market very closely. 2) I think that needs to be done in some sense is again to attract more inflows. However, clearly this has had a very limited effect. We have seen the finance minister try to attract more foreign institutional investors (FII) inflows. We have also seen a number of measures recently done for gold – to try and restrict the gold importation and that have failed to do much. So, here the issue again is growth. As we come into the wholesale price index (WPI) numbers next week, the market will want to see more dovish-ness from the RBI hopefully to suggest that there will be more to try and support growth. It goes against logic, typically what the markets expect is high interest rates to strengthen and support a currency. However, I think what we need to see is a more proactive response in terms of trying to engage growth and lift growth going forward. Q: So, do you think that this 57 mark that we are trading in is possibly just a seasonality factor seeping in and may just be an aberration and that the average of the INR or the range for the INR would be much lower or much higher than what it currently is? A: On paper I would agree with that. The seasonality is there, we have got a number of factors in terms of portfolio inflows, in terms of Unilever and so forth. That should board well for June as well, but the difficulty is just the price action. That is the disturbing thing here. The price action is not helpful and I think a negative feedback is not helpful. So, that is why I think we need to be careful here in watching that the market does not veer towards the self fulfilling expectation here. We continue to go into a cycle of weakness. So, I do think it is important that the policy makers no doubt are watching this and move into prevent this from becoming self fulfilling. While on paper there is a lot to suggest that the weakness that we have seen is seasonal, the danger here is that the market is getting a little bit unstable. Obviously, we have the non-farm payrolls as well. We will need to see what the verdict is on the US side of things because this is obviously not entirely India as well. Q: If you could give us a couple of targets, where do you see the rupee by the end of June and also I am sure you are working with some sort of a year end target on the dollar-rupee as well – if you could highlight that? A: We have been for the past year quite bullish on INR. So, we have been slowly revising up our dollar-rupee targets. We were looking for around 53-54, by the end of year, if not then end of Q2. That is why again, I see while some of these issues are superficial to do with May. My concern is how the markets will behave on June 17 when the RBI is expected to cut. Will the market rally on the expectation that will be enough to lift growth. Or if the market doesn’t rally because it feels that this growth is insufficient to support growth then we could be in bigger trouble and we would have to revisit our view.