Re to settle between 52-53/$, says Goel of Deutsche Bank

In the last few days the rupee has continued to gain strength and Sameer Goel of Deutsche Bank believes it has benefited from a huge round of global quantitative easing. He is also hopeful of seeing further upside in the Indian currency from current levels. Moreover, Goel feels the rupee has the capacity to outperform peer currencies from the emerging markets.

He thinks the rupee has the scope to overshoot to 51 per dollar levels but, it should settle comfortably between 52 to 53 per dollar. Also read:Re may touch 52/$; experts call for consistency in reforms
RBI may ease rates; Re at 50/$ by yr-end: Eco Affairs Secy
However, Goel advises investors to maintain a cautious undertone for rupee. He also believes that exporters continue to remain unhedged. Here is the edited transcript of the interview on CNBC-TV18. Q: Just give us a sense in terms of what exactly is driving the rupee at this point in time and what is your estimate in terms of a band for the rupee for the next three months odd?
A: The rupee almost had a bit of a perfect storm in the sense that there has been a mix of both pull and push factors which have helped the rupee outperform the other currencies. The push factors that we have obviously seen is a fairly larger round of coordinated global easing from various central banks and that is necessarily sending a lot more money out to emerging market shows.
The last time we had a similar kind of a liquidity inflow cycle after the LTRO in Europe, we saw almost USD 9 billion come into equity markets in India and about USD 8 billion into bond markets. There is a very significant push factor on capital here and very importantly, there is a very strong pull factor as well.
I think the sentiment was quite bearish on India and on the rupee before the various measures were announced by the government. Those steps are clearly being taken by the markets very positively and especially since there has been very little rollback on any of those measures, it is a sign that there is finally a willingness on the part of the government to take some bold measures which are investment friendly. It is a move to try and get money come back into India.
It is a bit of a confluence of those factors which is driving INR in particular to even outperform the other emerging market currency peers. Q: Is it good to go for more?
A: I think it is good to go for more. Obviously, there is some case for caution after the big moves we have seen already in dollar-rupee. But, I think there are some clear underlying factors why this momentum should continue for now. One, there are very clear tangible benefits as far as the underlying balance of payments is concerned. Appreciation in the rupee becomes a virtuous cycle that helps bring down the import bill even more, given how elastic India's imports are. Exports of course are a lot more dependent upon the global state of demand cycle. So there is not much which can be done.
Certainly, appreciation in the currency also helps feed into a positive momentum on portfolio flows. If we particularly see deferment of GAAR and as we see prospects of rating downgrade being less intense so forth and if we see more clarity on disinvestment cycle, we will see this flow sustain and probably build on itself.
We already also have scope of those debt inflows to start coming in now with the cut in withholding tax on external commercial borrowings. Exporters I believe, are still under hedged. I think there are several factors which can push for this movement to go bigger.
Of course from a market technical standpoint also there has been a lot more speculative short dollar-INR positions which have been built-up as the sentiment has shifted. Obviously, it is going to become harder for the currency to keep up the same pace of appreciation like it has in the past. But there is space for more. Q: Do you have a target for the rupee at all?
A; I think into the fourth quarter, before the end of the year we certainly have scope for it to move down to near about 51 levels. Ultimately, we would think it settles down somewhere in between 52-53 but, I would certainly argue an overshoot in the immediate term on dollar rupee down to about 51 levels.
_PAGEBREAK_ Q: Is there any indicator globally or otherwise on a six month forward or a 12 month forward because we just had the CLSA economist saying that the next budget is not expected to be very positive in terms of fiscal deficit. Even the current one isn’t expected to be but, March or February end may bring in the back tidings and if that keeps inflation at a higher pace then the inflation differential should logically pull the rupee down after that rise to 51 or 50 as the case maybe. Is there any indicator or your own reading?
A: I think I would not disagree at all with that contention. Both by the virtue of the fact that the underlying fundamentals in the currency are ultimately dictated by what the macro could differentiate, particularly inflation differentials does call for a medium term pace of depreciation in the currency. That is something we need to see on a medium to long-term basis.
I think immediately, from a three to six month perspective we have not seen good positive steps. I don’t necessarily think there is a very large scale political consensus as yet behind these investment friendly measures. Certainly, prospects are the budget next year will more formally enter into the election cycle. I think those are concerns which would potentially get the market a bit more worried that the currency appreciation cannot sustain beyond a particular point.
We certainly do have potential for appreciation in the near-term. But, I would argue when we look at a six to nine month term, you will need a lot more. Q: What do you expect from RBI and what is your ten year trajectory for October-November?
A: I think these two things can be slightly disjoint from each other. But, if you look at the inflation trajectory it is very hard for RBI to cut immediately. The delta on that increases to what the government’s measures have been. As far as the ten year yield is concerned, in the near term we could be in a sweet spot.
Issuance concerns have been pushed back, not eliminated but pushed back which means we now have the potential for 15-20 bps for the rally in the ten year treasury. I think 8% potentially, even slightly lower. Whether it sustains will depend how into the end of the year we see adjustment to the plan.