Re to decline more if investment cycle falls more: JPMorgan

The rupee started at 52.20 to the dollar this morning and then pulled back somewhat to 52.07-52.08. In an interview to CNBC-TV18, Brijen Puri, head - FX Trading at JPMorgan talks about where the rupee is headed.

Also Read: Fiscal concerns have investors avoiding rupee: BNP Paribas Below is an edited transcript. Watch the accompanying video for more. Q: Do you think we are done for the moment with the depreciation?
A: That’s entirely dependent on the RBI because if one looks at it fundamentally, we are in a BoP (Balance of Payments) negative situation. The current account has been surprising on the downside. On the capital account - we had European fears and some European de-leveraging impacting some of the short-term credit rollovers in Q3 of last year.
Q4 would have improved a little bit but given the noise around the investment climate be it the retrospective tax rulings, GAAR - the investment climate becomes a question mark and therefore funding of the current account remains a question mark. Unless we see an improvement in the situation, we could actually see some more depreciation pressure on the rupee. Q: What’s the market talking about as to what they think the RBI’s comfort level will be? Is there a level people are watching in terms of a retracement or do you think it will be a very day to day action from the RBI depending on how sharp the depreciation is?
A: I don’t think the RBI would be targeting any level. They have stated earlier also and they have walked the talk where they have intervened to steam the volatility. However, we would expect the RBI to come in some time soon because like November-December of last year, unless they intervene soon - we could see a spiraling negative sentiment.
So we would think that the RBI would look to intervene, try and push the dollar-rupee down by a 1-1.5%. What that would do is it would clean out some of the speculation longs in the market and ensure that whatever has happened to the dollar-rupee is more in line with fundamentals and not compounded by negative sentiment. Q: People are talking about ending the year at something like 55 to the dollar. Does that seem likely?
A: It’s quite possible. If the RBI does not intervene, we could see the rupee testing the previous highs in the near-term. However, that is not a base case. We think the RBI would not want this to spiral out of control. On the more medium-term picture our BoP and global sentiment must improve because that is extremely important. We have seen the global sentiment waver a bit over the past few weeks.
We have seen a mix of numbers - both economic and corporate results off shore but the markets are kind of loosing its way as compared to where it was in the first couple of months of the year. If we do see the European crisis linger and pick up and impact markets then the fear really would be on the investment climate in India and whether the capital account would be sufficient to fund the current account deficit that India has. Q: What would you assign higher weightage to in terms of an influencing factor right now? Do you think the market is focused more on FII flows, global liquidity or do you think it is the reality of a current account deficit at 4% which is keeping that force of gravity on the rupee constantly?
A: It’s a combination of the two. For the moment, the local factors are really compounding the global factors. Let’s assume for a moment that we do find a solution to the European crisis and that does blow over, we could see offshore sentiment improve towards the INR. Of course the tax and the GAAR would weigh but that is something which would be the driving factor, global factors would be driving and the local is something which would just compound.