Rupee may break 60/$ if FII outflows pickup: StanChart

Agam Gupta of Standard Chartered Bank sees the rupee moving in the range of 58.5/USD to 60/USD currently. He believes if foreign outflows rise further, there is a good chance of the rupee breaking the psychological mark of 60/USD.

"In the very short-term 60/USD is a crucial and psychological level and unless we see further equity selloff that will hold for the very short-term," says Gupta in an interview to CNBC-TV18.

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Meanwhile, he is not expecting rate cuts from the Reserve Bank (RBI) in the immediate future until rupee remains weak. He sees the new 10-year government security hovering in the range of 7.35-7.55 percent. Below is the verbatim transcript of Agam Gupta's interview on CNBC-TV18 Q: For the last two-three days the rupee has managed to defend 60/USD mark as it keeps coming close to that. Where do you see it headed in the near-term?
A: At the moment 60/USD is holding strongly on account of the fact that there is strong resolve from the regulator to cool down the market right now, smoothen the flows and reduce volatility coinciding with defending 60/USD. So, in the very short-term 60/USD is a crucial and psychological level and unless we see further equity selloff that will hold for the very short-term.

On a slightly longer term perspective, if the risk aversion from higher dollar rates play out and we continue to see weakness in equities and translates into outflows on account of equity foreign institutional investors (FIIs) then we could see 60/USD under pressure. Q: What are exporters doing and what are you advising them? Do you trust the resolve of the regulator and therefore, are you seeing exporters sell at 60/USD, are you advising them to sell at 60/USD? Do you think people are holding out and are also testing the regulator’s resolve?
A: Currently, it is more than Rs 3 in one year and so we are advising exporters to sell on any uptick and take advantage of the forward premium on medium-term basis. But if we see dips below 59/USD and towards 58.5/USD, then it is a good level for importers to hedge the short-term payables. So, we are looking at a range of 58.5/USD to 60/USD currently and if the actual outflows from the equity market pickup then there is good chance at 60/USD breaks. Q: What is your estimate of what the Reserve Bank of India (RBI) may have done today as well until now in the past week?
A: Last week they sold between USD 1-1.5 billion and today it is too early to put an estimate on the number for the day.

Q: If 60/USD mark breaches on the back of global conditions then do you expect a little bit of freefall or will the RBI constantly sell dollars?
A: I do not expect it to go into freefall. 60/USD is just a number so even if 60/USD breaches it is not going to go into freefall. You will see consistent RBI intervention and some other inflows that are lined up, they might come fruition. So, if 60/USD breaches it could go to 61.5-62/USD but you might see a correction from those levels. Q: What is your estimate of how much the RBI perhaps will use to stem the rupee volatility and the weakness that they have sold USD 1-1.5 billion? How much more buffer do you think they have?
A: The RBI reserves are close to USD 290 billion and they have been using them judiciously. They can easily use another USD 5-7-10 billion if they need to. If they think it is viable to do so, they can use USD 5-10 billion more of reserves to defend the currency. Q: How much do you think yields can go? We have seen a steady incline in Indian yields. Will it get much worse?
A: We are not expecting rate cuts from the RBI in the immediate future till rupee weakness is here to stay. We are also seeing reasonable outflows on the bond side from the FII sector and putting both these together you will expect bonds to remain a bit weak and the new 10-year which is trading at 7.45 percent right now, can get sold off by another 10 bps from here. Therefore, I am looking at range of 7.35-7.55 percent on the new 10-year government security.