Don't see major rally in Re due to EEFC flows: HDFC Bank

The Reserve Bank of India (RBI) on Thursday threatened exporters and banks with penal action if they were found violating its instructions on converting dollar funds into the domestic currency in a fortnight.

According to Ashish Parthasarthy, head treasurer at HDFC Bank, most of the EEFC conversion should have happened yesterday itself. "I don’t think there is too much left for conversions today," he told CNBC-TV18 in an interview.

The RBI had on May 10 cracked down on exporters hoarding dollars and asked them to sell half the foreign currency in their accounts. It also directed all exchange earners to surrender 50% of their future earnings for conversion into rupees.

RBI had given a fortnight's time to complete the whole process.

However, Parthasarthy does not expect significant rally on the rupee due to the EEFC flows. He says the EEFC conversion related inflow may have been around USD 400 million. "The rupee will continue to move inline with global sentiment over the next month," he reiterates.

 Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q:What did you make of the Reserve Bank of India's (RBI) statement yesterday? It almost seem like a warning to exporters on not converting their Exchange Earner's Foreign Currency (EEFC) accounts, do you expect a flood of dollar supply to come in today?

A: I think most of the EEFC conversion should have happened by yesterday. There was a possibility of a significant amount of it happening towards the second half of the day and you will see the rupee appreciate a bit towards the second half. I don't think there maybe too much left for conversions today.

Q: So purely on the back of that you don't expect a major appreciation in the currency?

A: No, not purely on the back of that. I think the macro numbers and the story is reasonably well known. Now onwards I think it will depend reasonably on the global sentiment. Unless there is a huge risk rally, rupee will continue to remain under pressure during this one month or so.

Q: So the 60-70 paisa yank back that we saw in the currency yesterday, you think is a direct function of the EEFCs getting converted?

A: Yes, there was some flow. There was partly EEFC getting converted, part RBI intervention and part other flows. Towards the second half of the day, there was some amount of bunching of all those flows and that is how the rupee reacted yesterday and pulled back.

Q: Any indicative numbers, could it have been a billion or couple of billion dollars which might have got converted?

A: I don't have a good feed of the numbers at that point of time but I don't think it will be as large as the couple of billion at that point in time. I think it would be more like USD 400-500 million at that point of time.

Q: Do you expect any meaningful pullback in the next few days or do you think it will grind around this 56 kind of zone?

A: Our base case view would be it would grind around this. It will all depend on the global sentiment, it will move along with global sentiment over the next few days or over the next month.

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Q: How closely is the rupee market watching the developments on the fuel price front?

A: I think directly fuel price hikes won't have an impact on the rupee market in that sense of the word. But yes, it will hope that the investor sentiment improve if measures like fuel price hikes be taken and that would help the rupee.

Q: You are saying as long as the euro stays around 1.25 and the dollar index continues to appreciate, chances of any serious pullback in the rupee are not very high?

A: Given the normal flows, I don't think the chances of any pullback are high. If there are some other extraordinary measures, that could change the level of the rupee. Otherwise, the direction seems to be very much looking at global sentiment and moving in that direction.

Q: Are you expecting any measures because you heard the RBI yesterday and the finance ministry has been suggesting that they are working on a set of measures. Has the market given up hope or you think something would come up in the next few days?

A: I don't think market has given up hope completely. The measures are still there, they have been taken before so they can always be taken. But I don't think you can take a call on whether they would definitely be taken and what is the time frame. It is only after the measure would the rupee react and not before.

Q: In the near-term do you see any prospect of flows giving the currency any kind of respite because FII flows have just dried up completely?

A: I think the capital inflows are very weak whether it is FII, FDI or even ECB kind of flows, they are not very strong. Unlikely, that I see too many flows coming in.

Yes, if the rupee were to hover at this level and show signs of depreciation, there could be some amount of exporter bookings which would come in, but that is about it. I don't see very strong capital flows on the capital account at this point in time.