Dollar-Re uptrend to continue; may retest 54 mark: IndusInd

Head of trading at IndusInd Bank Rajeev Mahrotri sees the dollar-rupee uptrend continuing till it reaches its previous highs close to 54 per dollar. “This is actually a continuing trend resulting from high trade deficit and a weak European outlook which affects India exports,” he explained.

He goes on to say that the mean value of the rupee has risen due to the variation in interest differentials between the US and India. “The mean value of dollar-rupee was around 43-44 a couple of years back, but it has now moved to a higher level to adjust for inflation differential,” he said. Also Read: Re to decline more if investment cycle falls more: JPMorgan On the positive side, however, Mahrotri says a higher dollar-rupee will eventually translate into lower trade deficits, due to slowing imports, which will in effect tame the rupee. Below is an edited transcript of his interview with Latha Venkatesh and Ekta Batra. Also watch the accompanying video. Q: What has led to this depreciation in the rupee and what do you think we are tracking? A: I think it’s probably a partial retracement of the upmove we saw earlier from 54 down to 48. Effectively, the upmove has resumed from 48.60 levels and has now reached about 52. So this is actually a continuing trend resulting from high trade deficit, weak European outlook which affects India exports and also possibly a strong dollar generally on account of better outlook in the US amongst the developed world as compared to other countries there. Q: Is there a slow grind of depreciation for sure and where do you see it by June 30 or thereabouts? A: There clearly is a funding issue out here and what adjustment we have seen in some sense is an adjustment to the big inflation differentials that have existed between say the US and India. So the mean value of dollar-rupee was around 43-44 a couple of years back, and it has now moved to a higher level to adjust for inflation differential. It is true that getting flows to fund the deficit will be hard, so the correction has to come from slowing imports and that is coming in the form of slow growth that we are seeing which should result in slower imports. Also government steps like import duty on gold should slow down gold imports. So we should start seeing the effect of higher dollar-rupee translating into lower trade deficits and hence that should then come into control the rupee. Q: In the process, what would you tell an exporter from a three month forward or six month forward view? A: You should go back and test 54 levels that we saw a while back and until that we will probably see an uptrend in dollar-rupee. Q: At one point we were tracking the euro but that seems to have snapped because we have depreciated as compared to the euro, which has maintained its level at around 1.31 against the dollar. What is your analysis of what we are seeing in terms of a trend versus the euro? A: There are few factors here. For one, the correlation is very weak now and that is partly a result of different factors driving the two currencies. In India, the rupee is clearly facing a funding issue whereas in Europe the euro is really a function of sovereign fund buying and also the risk-on and risk-off resulting form sovereign debt issue there. Since different drivers exit for the two currencies, the correlations have weakened a fair bit. Q: Since you also handle money markets, would you factor in RBI intervention in the dollar market and therefore rupee tightness on that account in the money markets? A: At some stage probably RBI would intervene, but I don’t know if they intervene at these levels or slightly higher levels. Q: But is it a factor in this quarter? A: Absolutely, it could be there. Q: The pound is sitting at a five-month high against the dollar and it’s quite expensive against the rupee as well. Any analysis on the pound? A: Broadly speaking, there has been no further increase in quantitative easing. Also, as compared to Europe, the UK economy looks to be on a sounder footing, so this has resulted in pound performing better as compared to some of the currencies like euro against the rupee. Have You Read: Fiscal concerns have investors avoiding rupee: BNP Paribas