Rupee may hit 56.5, may see some RBI intervention: Nomura

Surprised by the pace of depreciation recently seen in the Indian currency, Neeraj Gambhir, MD & Co-head, Fixed Income, Nomura India warns of a further upside from hereon. One cannot rule out the possibilty of the rupee depreciating to 56.50 going ahead, said in an interview to CNBC-TV18.

"We have broken some key levels. If we takeout 56 on the upmove, there could be a little more upside to the USD/INR rate which means rupee could depreciate more." Also Read: Nifty may hit 5400; dollar rise could hit carry trade: Citi Meanwhile, he feels there could be some intervention by the Reserve Bank of India (RBI) at 56 and above, but that will not be very substantial. Below is the verbatim transcript of his interview on CNBC-TV18 Q: Are you surprised by the speed at which the rupee has gone to 56? What is your prognosis from here? A: The pace of depreciation has been a little surprising, but the fact that it has depreciated, has not. Fundamentally, a CAD economy cannot see a substantial appreciation in the currency. Our currency was appreciating because we had large inflows coming in and the demand at that point in time was a little less. At the end of the day, we do require a substantial amount of capital flows and whenever there is wobbliness in the capital flows, you will see the currency underperform and that is exactly what has been happening with the rupee right now. It seems like a bit of a technical move. The market has caught a bit short and that is the reason why the pace of the move has been pretty steep. We have broken some key levels. If we takeout 56 on the upmove, there could be a little more upside to the USD/INR rate which means that rupee could depreciate towards 56.50 or so. It all depends upon how the global scenario pans out, how the dollar strength pans out and what kind of flows are we see going forward in the next one-one and half months. Q: It seems that on Thursday, the RBI did not intervene when the rupee touched 56, but in the past, they have indicated that as the level beyond which they are uncomfortable with the rupee's depreciation. Given the pace of depreciation do you think we could slip a bit more? A: Unfortunately, I do not think that RBI has ever mentioned a particular level where they say that they will be uncomfortable. They intervened a little bit whenever they saw the pace of depreciation to be a little faster than what they could be comfortable with, but the at the end of the day they have allowed rupee to find its own level especially given the size of the CAD that we run. You could see some intervention at 56 and above, but I do not think it is going to be a very substantial intervention. Eventually, rupee will find its own level slowly and steadily and what RBI could do is basically end up providing a little bit of supply on the upside so that the market does not completely go out of the hand. 56-56.5 could be that level where we could see a little bit of supply from RBI, but I do not anticipate them to completely stop the trend. Q: Do you think one should be keeping an eye on global currencies more than the local macro issues? Things like, how much dollar index can appreciate from here, how the yen-dollar moves? Do you think the answer to whether the rupee will depreciate lies more there than our well-known macro negatives which we have been grappling with for the last many months? A: The global issues do continue to be a big factor as far as the currency movements are concerned. We have seen a reasonable amount of dollar appreciation in the recent past. If the US economy continues to be on the mend, then dollar could appreciate a lot more, specially against currencies like Japanese yen where the Bank of Japan (BoJ) is pumping in a lot of liquidity to depreciate yen. Yen exchange rate has a good bearing on how Asians perform and rupee is the part of the Asian block of currencies and so it does have an impact. Rupee also tends to behave a little bit more like a high-beta Asian currency where any impact on dollar versus Asia, tends to get magnified and that magnification process is also driven by our core macro fundamentals. So, it is all interlinked. We cannot completely ignore the domestic macros, but reality is that in the short run you do have global environment impacting the exchange rates quite a lot. Q: How does the bond market deal with all these developments? Both equities and rupee have been pretty turbulent through a couple of days. What would you expect from that market in terms of where the yield could move between? A: Markets have paused in a way. The rally has taken a breather here and people are watching out to see how much bad it can get for rupee. The reality is that a very substantial depreciation in rupee does bring in some kind of inflationary pressures, because our commodity prices in rupee terms start looking up and that needs to be passed-through specially in oil, diesel. So, it does impact the domestic market sentiment to some extent and we need to see how much of this rupee depreciation pass-through will happen in terms of the domestic prices going forward. Fundamentally, the market is in a fairly positive mode. The inflation prints are going to be lower over the next few months and that should give RBI a lot more scope in terms of rate reduction. The market is currently discounting somewhere close to 50 bps rate cut over the next three to six months timeframe. If that expectation were to change, we will see some selloff in yields as well. As we speak it is a bit of a consolidation phase in bond market.