Rupee to remain weak, may hit 57.30/$ in short-term: HSBC

Dominic Bunning of HSBC expects the rupee to remain weak in the short-term and touch June 2012 level of 57.30/USD. However, he feels that the Indian currency is in a relatively better shape than its Asian peers.

"If you track the rupee, real effective exchange rate (REER) which is inflation adjusted measure of its trade partners, the rupee is not necessarily a lot weaker, he told CNBC-TV18. The rupee hit a one-year low as it crossed the 57-mark in the early trading session on Thursday. Meanwhile, he anticipates the current account deficit (CAD) to stabilise in the medium-term and sees foreign investment coming back in the country. Given that rupee's weakness was not a bigger concern, he said that the Reserve Bank of India (RBI) is now holding back for the volatility to reduce and focusing on reducing inflation. Also read: Indian rupee opens weak at 56.92/dollar; down 20 paise Below is the edited transcript of his interview to CNBC-TV18. Q: There has been consistent pressure on the Indian rupee. What kind of immediate targets are you looking at on this one? A: With the rupee, we are seeing is poor dollar demand across the whole of the region. This is really stemming from large external factors rather than domestic factors. I do think there is still some room with regards to more rupee weakness in the short-term. The most obvious target would be the level seen in Dollar-Rupee back in June 2012 which was around 57.30. We can certainly move up towards that level in the near-term. But ultimately, that structurally is a slightly positive story that could be emerging from India. If you look at India versus some of its competitors and peers, then the currency does not look as bad a shape as some of those other Asian or Emerging Market (EM) currencies. Q: Hasn't the pace of depreciation for the rupee been far sharper than many of its Asian peers? What have you put that down to? A: Yes, it has. The rupee generally has been more high-beta in nature and will move with greater volatility than its peers and the Asian currencies. This partly comes down to the fact that there is a consistent dollar demand onshore for the current account deficit (CAD). But, in the medium-term, we are a bit more constructive simply because we do think the reform process in India will help to stabilise the current account and will help to increase greater investment from abroad. There is definitely short-term rise particularly because the external environment and the overall demand for dollars. But we are not going to see an aggressive further move higher in dollar. It is more likely to stabilise in coming few weeks or so.  Q: In terms of the Reserve Bank of India's (RBI) next move, what do you see them doing? Do you see aggressive intervention into the currency market or given the fact that they will have to retain enough reserves to pay for imports; this may not be too easy for the RBI to do? A: In terms of RBI and policy regime versus rupee, we have not seen as much an intervention by them, as we have in the past to stabilise (the rupee) and move higher. But when you look at it across the region, and look at the rupee versus its peers and competitors, that has not necessarily weakened as much. If you track the rupee, real effective exchange rate (REER) which is inflation adjusted measure of its trade partners, the rupee has not necessarily a lot weaker. From a volatility perspective versus its peers, the rupee has not necessarily moved that aggressively. The RBI maybe standing a little bit back from intervening aggressively and maybe has not got quite as bigger concerns around the inflation as it had in previous cycles. So to some extent a weaker rupee is not necessarily as much of a problem as it could have been in the past. Q: The RBI has done something to alleviate stress for flows by hiking gold imports etc. and some administrative measures have been undertaken. Do you think that in anyway will help alleviate the pressure on the rupee? A: Certainly the measures over the last few months on gold imports; previously not just from the central bank, but from authorities across the board, were to entice more foreign investment flows by cutting Withholding Tax These measures are certainly a positive measure for the rupee and that is going to help to limit the CAD on the gold side. We would also be a little weary of rubbing too much into that because when we have done some analysis of the impact of lower gold prices on the CAD the demand is not necessary changed. There is still likely to be a fairly resilient amount of demand for gold in India. So it is positive at the margin, but I would not read huge amount of inflow. We need to see much more broader structural reform which is what we are seeing for some degree coming through and when we start to see more traction on that then we are going to see the rupee start to outperform some of its peers.