Re likely to underperform amid low volatility: Barclays Cap

In an interview to CNBC-TV18, Nick Verdi of Barclays Capital discusses the fall of the euro and the rupee and why he thinks the Australian dollar will be well supported.

He also mentions reasons for the decline of these currencies. “At the moment the rupee is perhaps underperforming due to factors that are specific to India such as the trade-outs that we had today and then the lack of reform process that started earlier in the year,” he adds. Below is an edited transcript of Nick Verdi's interview on CNBC-TV18. Q: We had the euro-dollar slip to 1.268 on Friday. It's above the 1.27 mark right now. Do you think the near term trend for currencies like the AUD or others may slightly go down in the near term?
A: I think it will be quite a differentiated picture. The likes of the Australian dollar will actually be well supported because Chinese economic activity is performing very well. On the other hand some of the heavy currencies will underperform. So, after QE3 the likes of the ruble, the Brazilian real, the Indian rupee did very well.
However, now given there are a number of risks that will become more evident into the year end such as the fiscal cliff and European concerns. Despite this fairly low volatility environment, high carry currencies such as the rupee will actually underperform. Q: Do you see a lot of coupling between the rupee and the euro-dollar? If the euro-dollar is to move down because of risks regarding Greece or anything else, do you think the rupee will also follow the suit irrespective of the domestic fundamentals?

A: I think that is broadly true. At the moment the rupee is perhaps underperforming due to factors that are specific to India such as the trade-outs that we had today and then the lack of reform process that started earlier in the year. If the euro was to come under pressure then the rupee would fall and the rupee would struggle not to follow the euro’s downward path, but at the moment they are somewhat disconnected.

Q: We got some information from Finance Ministry sources indicating the FII limit in G-Secs and corporate bonds could be hiked. It is under consideration. Are investors abroad anticipating that there will be move from the government which will enable strengthening of the rupee, something like what we are picking up from the Finance Ministry sources? Are you factoring in when you make your models and estimates, the year end target for the rupee?
A: Moves such as those would be welcome. Of course, a lot of foreign capital flows that are coming to India tend to come through the equity market.  Given we had a selloff in the rupee recently, markets are not pricing this.
What we saw earlier in September when the FDI announcements were made, markets were ready to give the rupee the benefit of the doubt. That is why we saw such a strong rally then. The market is pricing in a reform process that has stalled rather than reaccelerating in the near-term. Q: So, in the short as well as medium term what would the direction and target on the rupee versus dollar be?
A: In the near term we have been caught on the hop that a little but the move in the rupee comes with a 6-12 month forecast which is a move down to 52. In the near term the risk is if the sell off continues and the dollar-INR moves slightly higher. Q: Do you think the RBI would be in a frame of mind to accumulate some forex because the rupee had strengthened, could that be leading to some weakness? What do you think is playing out on the RBIs mind at the moment?
A: Just like some of the other current account deficit countries in Asia, such as Bank Indonesia, the RBI would welcome some reserve accumulation for sure.The question is whether it would want to employ those reserves now or step back and try to put some implicit pressure on politicians to come up with further reforms. So, at the moment we wouldn’t expect the RBI to use its bullets. We are in a very low volatility environment that is why the move today seems quite excessive. This is only in the context of today’s markets. If we cast our minds back a few months this is actually quite a small move. Q: If one were to ask you to crystal ball gaze and say how do you determine the rupee’s direction till the budget which is the most significant trigger? Would you play for a rupee at 56-57 back to the lows or would you be there with the government’s push towards reform, a move towards 52-53, six month view for an investor?
A: In the six months view I am pretty comfortable with a move down to 52.  You probably see more on the domestic front. The RBI will probably have more room to cut when we do get to that stage. The global environment will be more stable. We are seeing the US and China growing fairly well now and hopefully some of the European concerns can be put to bed by them. So, 52 is fair in six months.