Political logjam may weaken the rupee further: Nomura

Neeraj Gambhir, managing director & co-head of fixed income Nomura India, says that the rupee may see bout of weakness as the overall policy-making climate looks week.

Also read: Parliament's retail FDI push can trigger market: PN Vijay Below is the edited transcript of his interview to CNBC-TV18. Q: In last few days what is pegging up the rupee, what accounts for this kind of weakness? A: Fundamentally, last trade data was not very encouraging and trade deficit is at an all-time high. For the year as a whole, current account deficit will be significant and our dependence on capital flows will continue to remain high. Fundamentally, over a period of time the rupee will depreciate. We will see bout of weakness to come in as the overall policy-making climate looks weak and that was the case last week. There is no clear visibility as to what will happen in the Parliament. Besides short term movement, fundamentally currency looks weak over a longer period of time. Q: On Tuesday, we got as low as 55.70, what kind of downside risk do you see even immediately for the rupee? A: In the short run, the rupee movement will be driven by newsflow, capital flows and global risk sentiments. In last one-two days, we have seen some improvement in the sentiment, some positive news around the fiscal cliff and the dollar has been a little weak. I think the rupee is benefiting from that. Our own house call is that the probability of the fiscal cliff getting resolved before Christmas or before the end of the year is around 50 percent. So, if the newsflow turns adverse and the markets start to get choppy again around the capital flows, then I think rupee could certainly breach the previous high. We are looking at somewhere close to higher than 55.70 but somewhere close to 56 in the near-term, if the newsflow turns negative. I do believe that some of the houses have called for a better 2013 for India and that may lead to some capital flows going into the year-end or maybe early January. That is the supporting factor that we could look at, which could probably keep rupee pinned down to somewhat lower levels. So it is going to be volatile and negative news could easily swing it towards 56 levels. Q: What about the other possibility that the newsflow improves. You get some serious business transacted in parliament over the next few days; people get little bit more confident about the India landscape. In that scenario, how much of a pullback on the way up can you justify for the rupee? A: I think the movements in the rupee have become quite volatile. It is not unreasonable to expect in the current market scenario, a daily move of at least half a percent or sometimes even one percent. So if you do get a series of positive newsflow, positive statements and positive action from the policy makers side and we see a substantial pick up in the capital flows then I would not be surprised if we kind of head back all the way towards 54 initially, and then maybe a little lower as well. Although, the probability of it happening is lower. I do feel that the markets are going to brace a lot of choppy news items; a bit of uncertainty around some of the major things. Fundamentally, rupee is still going to be somewhat of a weak currency. Q: Is this primarily a local problem or do you think if things improve on the global landscape, the rupee will as well because earlier this year when we got to these levels, a lot of other emerging market currencies were weak? A: The problem around the rupee has been more idiosyncratic towards India. The biggest issue in my mind is the size of the current account deficit. At about USD 70-75 billion a year, it is a very large current account deficit and we need that much capital flows both in the form of equity flows as well as debt flows to finance that. At any point in time when we see that the domestic market sentiment is weak, which impacts the capital flows, the issue around financing of the current account deficit continues to come back to fore. Which is why, I feel that over a steady timeframe, over a longer horizon, the weakness in rupee is something which is kind of justified. We will change our call around rupee only if we see a substantial improvement in current account deficit on account of weak rupee. We have not seen improvement in the current account deficit that we were expecting to happen as a result of weaker currency. So, there is some more time that we will give to see whether the size of the current account deficit comes down.