Despite fall, Rupee outperforming some EM peers: StanChart

The Indian currency is in the intensive care on ailing health. On Wednesday, it fell to a five-month low to 54.26 against the US dollar on increased capital outflows amid strong demand for the greenback.

Ananth Narayan, MD, Global Markets & Co-Head of Wholesale Banking, South Asia at Standard Chartered Bank, however, thinks that in the adverse situation it is only expected that the rupee will catch a bit of cold from the global flu. In an interview to CNBC-TV18, he said that rupee is still outperforming some of the emerging market peers at this point. "If you see currencies such as South African rand and Brazilian real they have depreciated a lot more in May than we have. So, the RBI and the market ought to be a lot more sanguine this time around than we were in second half of last year when it appeared to be only rupee which was overreacting compared to the rest of the street," he explained. Narayan feels that the central bank is cognisant of global volatility but not in a position to defend much. He is hoping that RBI will closely monitor levels at around 54.30 per dollar. The RBI has spent more than USD 20 billion in spot market intervention between September and March, and stepped into markets since, including on Tuesday. It has carried out several other measures to try to check the fall in the currency, which hit a record closing low on Monday of almost 54 per dollar. Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video. Q: Is that what indications are that there was some bank buying which pulled us back almost from our all time lows? A: Yes, there does seem to be some amount of interest on the Reserve Bank of India (RBI) to ensure that the markets do not run away. We have seen the evidence in the last few weeks and that continues. But, what's been happening on the global market and in the forex market is a reflection of what is happening globally. We are moving in tandem with the rest of the market and in some cases, we are moving less than the other markets. If you see currencies such as the South African rand and Brazilian real they have depreciated a lot more in May than we have. The RBI and the market ought to be a lot more sanguine this time around than we were in the second half of last year, when it appeared to be only the rupee which was overreacting compared to the rest of the street. Q: Given the fact that other currencies are also depreciating quite fast, do you think the RBI will just smoothen out the 5,400-5,430 kind of level little bit but, not push the point too much? And if the rupee has to depreciate, it will probably form a new low in the next few days? A: I think it's a definite possibility. I am sure the RBI is completely cognizant of what is happening globally. The fact is, this is a risk off mood and it's reflected in the way dollar has strengthened over the last couple of days. We cannot be insulated from what’s happening globally. It's only to be expected that rupee would catch a bit of cold from the global flu. To that extent, the tolerance for rupee weakening would increase within the RBI. Having said that, the action from them over the last few days and weeks have been pretty decisive, whether the action on Foreign Currency Non Residential (FCNR) front on the Exchange Earners Foreign Currency (EEFC) front etc and in terms of the actual intervention which seems to be going on in the market. They would look at 54.30 very closely, the last intraday low on the rupee. But their appetite for a bit of rupee depreciation, given what's happening globally, would have increased now. _PAGEBREAK_ Q: What is the big problem which is weighing on the currency now because we haven't seen very meaningful outflows from India and the equity market because of the risk off trade that you alluded to, but is it the weakness in the euro day after day from 1.3 to 1.27 which is probably leading to this readjustment? A: There are a couple of fundamental issues which we all are aware of and frankly the global press and we all have been talking about it since last few weeks and months. There is a trade deficit issue, there is a flow issue where we have a shortage of dollars which needs to be filled up from somewhere and we have a weak growth story right now which is making people with capital inflows to think. More than anything else, the fact that exporters aren't going out of the way to sell, we aren’t seeing large scale FDI or investments into the country coming in right now. Everybody seems worried about where the rupee is headed and therefore, postponing the inflows that they might have planned for the country. On the other hand, importers are worried as well and are coming in to cover as and when possible. To that extent there is a mismatch on account of this expectation which is reflecting currently. RBI is doing a reasonably strong job in smoothing that out but, eventually given the fact that the Real Exchange Rate (RER) has moved very favourably for the rupee. In the long run, hopefully, when we have sorted out our basic issues it should settle back to a more reasonable level. Q: Is that the bigger problem though, not that there is an outflow situation the market is grappling with but that inflows have completely choked up and has that pushed consensus to the 55 mark on the rupee? A: I think that is the underlying problem. I think there is a bit of crises of confidence right now and that's reflected in all asset markets in the country, whether it's stock or in the rupee. There is an issue of people wondering whether the India growth story is a temporary hang-up or is it something which is more secular. I think the markets are tending to go towards the other side of the pendulum. The markets are overreacting in that sense. What we are seeing is probably temporary. Eventually, we should come back to the long-term strengths of the country in terms of demographics, in terms of infrastructure story etc. But, we will have to pay this out. So you might see things getting worse before they get better. However, that's probably a reflection of the way global markets are and the India specific story is.