Rupee likely to touch 62 against dollar soon: Moses Harding

Moses Harding, Head ALCO, Economic & Markets Research, IndusInd Bank says the reason behind the sharp drop in the domestic currency was the extended rally in the dollar index above 82.5, driving the euro below 30.50.

Talking to CNBC-TV18, he says that given the general dollar index upmove driving the euro towards 27.5 and 1.285, there is a risk of the rupee extending its fall and touching 61.5-62 levels. The rupee should settle down between 59.5-61.5 against the dollar when things cool down, he says. Below is the edited transcript of his interview with CNBC-TV18 Q. What is the reason behind the sharp cut that we have seen over the last hour or so? The fall at this point is a rupee from Tuesday's close, but a percent lower just in the last one hour itself. We understand that the rupee's fall is due to the bank's stop losses being triggered, but could you explain what really happened in the dealing room and was 60 indeed the level that was being watched out for? A: Reserve Bank of India (RBI) was defending 60 against the overall weak sentiment and low confidence. The trigger was that extended rally in the dollar index above 82.5 driving the euro below 30.50, that was the first trigger which pushed rupee beyond 59.90 and beyond 60 it was a free fall with stop loss triggers and importers' panic. It was also felt that RBI may not go against the strong current, because the surprise will be unaffected. We are seeing an extended fall and in my view RBI will look for a demand-supply equilibrium level to pump in fresh supplies. I believe that between 60.35 and 60.65 wherein you are getting 12 months forward dollars above 64 where some supply will come in. Having said that, given the general dollar index upmove driving the euro towards 27.5 and 1.285, there is a risk of the rupee extending its fall towards 61.5-62. That is in the back of the importers' minds, who are covering 1-3 months imports. Most of the authorities are also saying that there is a new norm for rupee now around 59-62, so that has also accelerated demand for the dollar while supplies are held back. Another belief is that FIIs may defer this rupee above 60 and may come in with fresh supplies with rupee above 60 and 10-year bond above 7.5 percent. So these are the factors in place. Rupee should settle down between 59.5-61.5 when things cool down. Q: Rupee is down 7 percent in June, 12 percent since May and intermittently we have seen the RBI intervene when volatility increases. What really can the RBI do now? Will market intervention help or do we need more essentially? A: It is a hard fact that RBI has no or limited firepower to defend the rupee, while it is easy for RBI to defend the dollar by absorbing it and pumping rupees into the system. While defending the rupee against strong headwinds, we need to sell out more dollars they do not have in the reserves and they will be cutting out rupees from the system which they do not have in the system. So against these complexities, RBI's ability to defend and provide a turnaround is next to impossible. That is the fact that the stakeholders have in mind. So the RBI will only cushion and cannot prevent any cut down of rupee at the open. This is the risk which is keeping the importers' fears and exporters' greed in play. Q: What is your medium-term target? Targets for the last few weeks have been smashed. Would you say 59.5-61.5 is your medium-term target as well? What are you working with levels-wise till December? A: I will look for a sharp reversal from 61.5-62 back to 58-59. It would make sense for exporters to use this extended weakness into 61-62 to cover their long-term exposures and probably it would also make sense for people to convert the rupee liabilities to foreign currency, because the base impact will come into play. Rupee has moved into 60s, so it is a very big base to cover your future depreciation if any. The base effect and an attractive forward dollar will provide supplies and if government comes with the measures that they are talking about, then we should see a recovery towards 58 and 59 gradually.