Re may touch 52/$; experts call for consistency in reforms

After the government announced a slew of reforms, foreign inflows have strengthened the Indian currency and it has edged higher in the last few days. In an interview with CNBC-TV18, Vivek Rajpal, Rates Strategist, Nomura India believes the rupee will not move below 50 per dollar in the near term. But, there are fair chances that it wil appreciate to 52 or slightly lower levels. He further stated that global risk appetite needs to be buoyant for more upmove in the currency.

Also read: RBI may ease rates; Re at 50/$ by yr-end: Eco Affairs Secy

Nizam Idris, Managing Director, Head FX Strategy Asian Markets at Macquarie Bank is of the view that the Indian currency will see some more upside from the current levels and may touch 52. However, in order to see that kind of an appreciation, there has to be a consistency of reforms from the government, he added. Moreover, the currency upmove will not last only on promises, the reforms will have to be implemented for sustaining the move. He also feels the banking union and open market purchases are key triggers in Europe.

Here is the edited transcript of the interview on CNBC-TV18.

Q: Where is this money coming from? Is it largely FII money or are exporters also panicking at higher levels and selling off. This rush of the rupee's upturn has come from what sources?

Rajpal: I think it is mainly the FII money. Yes, exporters have also started contributing but it is mainly the FII flows that have contributed.

Q: The rupee move has been a bit of an outperformance or a reasonable amount of outperformance when you look at the other emerging market currencies. What according to you has cost this and is this good to go for more?

Idris: I think there has been a lot of equity inflows. It is like USD 7 billion worth of equity inflows over the last three months. I think the market voting positively to what the government has done over the last couple of weeks in terms of reforms. For me, there is still some way to go. I would give the government a benefit of doubt in the near term to say that these reform moves are positive for the rupee and I am looking for 52 or slightly below that.

Q: We just spoke to a technical expert and a government guy over the weekend and 50 is a number which both of them spoke about by the time we came to next year. Would you say there is that much positivity in the rupee in terms of the flows that you are looking at and investor expectations?

Idris: Over a medium-term you have to show consistency in reforms, not just benefit of doubt anymore. You need to see results, both in terms of capital inflows and FDI inflows. Also in terms of sale of government holdings in aviation and the rest, there has to be results. It is over a longer term, beyond three to six months that you need to deliver the result. You would not get positive just on promise.

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Q: Does this rally in the rupee have legs, what are you expecting in 2012 itself and what would you see as a medium term high? When I say medium term, I mean only two quarters, six months perhaps?

Rajpal: We think 50 is a little optimistic, but 52 is a fair level and it may go below 52 because markets always over reacted. However, to sustain this momentum on the downside, we really need support on the global front and the local script needs to be very benign from here onwards.

The momentum will continue because we will probably continue to get positive news over the next month or so. But, beyond that will it continue to appreciate? We have our doubts and 50 sounds a little optimistic to us.

Q: Speaking of the global moves as well, how are you charting the euro dollar as well as the dollar index for 2013?

Idris: The euro has priced in quite a lot of positive from recent announcements, both in terms of the decision from the German court as well as ECB's OMP programme. This decision would have reduced the risk and therefore the market has priced in some of those positives. But there are still a lot of uncertainties in the longer-term.

The question of a banking union, the question of liability over debt in the periphery economy as well as new bonds for example, are still big questions and there is a lot of uncertainty. Above 113, euro dollar will look a little expensive. For the US dollar index you have to balance two issues, one, the euro which is already pricing in too much positive and the other is QE3 which will weaken the currency.

So the net effect is probably dollar index which is around 79 to 80 kind of a range for now could weaken a lot more until we see the European situation improving.

Q: We just had a CLSA economist saying that they are constructive on the dollar in 2013 probably because of fiscal cliff and other reasons, they expect the dollar to remain stable for a better part of 2013, at least the latter part. Is that your assessment as well or do you not care to look that far into the future?

Idris: I do look into the future. For me in the short-term, there is QE3 to worry about, there is fiscal cliff to worry about. But, the point is that if there is uncertainty about the fiscal cliff or Europe, the dollar could strengthen and not weaken. In fact the fiscal cliff basically means that the US fiscal situation would be stronger and that would be positive for the dollar and the US treasury as well. So, all these will actually strengthen the dollar.