Rupee to stay in 58-62/$ range now; CAD may dip: StanChart

Rupee likely to remain volatile going forward, says Ananth Narayan of Standard Chartered Bank after rupee breaches 61 against dollar on Monday. Currently, he expects rupee to be in the range of 58-62/USD.

In an interview to CNBC-TV18, he says at 61/USD, one can expect current account deficit (CAD) to improve. "We are already seeing a noticeable dip in gold imports, non-oil, non-gold imports as well," he adds. 
Due to decline in imports, he believes the trade deficit will come down to about USD 13-14 billion in June and July and that trend may continue and CAD could dip from USD 7-8 billion a month to about USD 5 billion a month going forward. Below is the verbatim transcript of Ananth Narayan's interview on CNBC-TV18 Q: Rupee at 61.1 per dollar, what is going on in the market?
A: It has remained volatile for the last couple of months now and that trend continues due to a combination of global factors, and the fact that India has been somewhat high beta given our current account deficit (CAD). We are reaching levels where some of the fundamental issues are getting sorted by themselves. So at 61, expect CAD to improve. We are already seeing a noticeable dip in gold imports, also non-oil, non-gold imports as well. To that extent, expect trade deficit to come down to about USD 13-14 billion in June and July and that trend could continue and CAD could dip from USD 7-8 billion a month to about USD 5 billion a month going forward.
So, we are reaching levels where if we have a better stability, if we manage to entice investors again to breach the smaller CAD gap now, we could be reaching levels where the rupee should start to stabilise.

Q: There is no circuit in the bond market today. Are you hearing of sharp outflows because there were some last week?
A: There have been outflows in the foreign institutional investor (FII) segment and debt for the last month and a half now. Last month was USD 5 billion plus of outflow and it is again a combination of few things. Yields globally have been going up.
The interest rate differentials have been narrowing and also the bond market rally was backed by three things, FII purchases, expectations of more monetary easing and open market operations (OMOs) from the Reserve Bank (RBI). All three have looked little queasy in the last couple of months ever since the Fx volatility began. So to that extent, pressure on bond markets will remain.
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Q: There is some talk that direct funding of crude by Indian Oil might be considered and might be a reality this week. Will that help significantly or do you think those might at best rein in the slide temporarily?
A: It could help. These things have happened in the past, all kinds of taps are available with the RBI and with the authorities to open up, there are leaks that they could plug as well. We eventually need some form of stability in the markets. Even though CAD is improving, we still are in a situation where we need capital flows to come in on a regular basis. In a very volatile situation, it is difficult to entice capital flows in.
One of the pre cursors and prerequisites to bring in capital flows on a sustainable basis is to have stability and remove the fear of rapid 13-14 percent depreciation in a month.
Secondly, you need the long-term growth story to re-emerge in the country. Such steps could help bring in the stability required to otherwise let the fundamentals play out and bring some overall balance in the market.

Q: Now, the market also knows the exact quantum of Hindustan Unilever (HUL) open offer and some of it has come in already. Do you think that is priced in fully at 61 because people were hoping that once that money comes in at least there will be some pullback in the currency?
A: The entire money has come in which added to the dismay last week because it was a good week given the size of the Unilever flow coming through. One would have expected that to actually bring some stability to the rupee market. Instead, we saw the rupee losing value and now going forward the prospects of any more anecdotal flows have come down.
There is palpable improvement in the CAD, it happens to be slow, there are large inelastic elements to our CAD but we are already seeing a dip in the trade deficit from USD 18-20 billion to USD 13-14 billion levels.

Q: While no one can foresee immediate targets, has there been a complete reset in what range people expect the rupee over the course of the next six-eight months? Have levels changed dramatically over the last month?
A: They have changed in the last couple of months. For eight-nine months until May this year, the rupee stayed in the range of 53 to 56. Clearly that level now looks a little distant. I still think we will stabilise at levels lower than where we are currently. Things look pretty volatile right now, 53-56 looks pretty far off, it is closer to 58-62 kind of range at the moment. Q: This morning you saw some kind of intervention from RBI when the rupee breached 61/USD, but then it could not quite filter that out and 61 was broken? Was there even an attempt this morning?
A: Difficult to say. We did see some selling in the morning at 61 levels, not sure if it was RBI as yet. It is a combination of everything, there is probably some amount of intervention going through, but at 61 level may be there are levels coming up for exporters to come in and start booking some hedges.