Current move in rupee looks a bit stretched: Citibank

The rupee today lost 31 paise to trade at fresh four-and-a-half-month low of Rs 53.72 against the US dollar in the early trade.

In an interview to CNBC-TV18, Soumyo Dutta, managing director and head FXLM trading and risk treasury of Citibank says, the current move in rupee is little bit stretched. “Typically, when these kind of moves happen, even small positive news can bring back a lot of cheer in the investor sentiment. We can see some meaningful pullback from the current levels,” he adds. Also read: Re close to Dec lows; RBI unlikely to defend levels, says Nomura Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video. Q: What accounts for this continued weakness in rupee? We know the trade data, that’s at least ten days old. We have come to terms with the current account deficit. Why does this lingering weakness not go away? A; I think it’s more of a timing mismatch and the flows. We all know the current account deficit, a 4% deficit, maybe USD 300-400 million, if you just uniformly divide it across the year. Everyday that kind of outflow is there. It’s just about the mismatch of timing. However, I still feel that should not cause 1% move everyday and 2-3% move every week. I would like to believe that this move is little bit stretched. We should be close to the top somewhere. Q: Do you think that we are going to break the all time low of 54.3? What do you think is a sustainable level? We did recover from 54.3, but we are back close to those levels at this point in time. Can you give us a sense on what is the sustainable average we are working with for the rupee? A: It is very difficult to call the top from where exactly it turns or whether we are going to test the previous high of 54.3. Yes, for sure, we are very close. Is there a chance that we may see that anytime soon? The answer to that is probably yes. But having said, the moves cannot keep on stretching on one direction indefinitely. There are outflows true, but there are inflows also which can come in some bunches, which can come in some lumpy manner. More importantly, typically, when these kind of moves happen, even small positive news, for example, if we really see some good news on the GAAR front next week or if we see some meaningful adjustments to the fuel price, these can definitely bring back a lot of cheer in the investor sentiment. We can see some meaningful pullback from the current levels. Q: The real effective exchange rate on the five country basis, the five most important trading nations with India, if you take the 2004-2005 base, which is really the working base, we are still overvalued by about 5%. That is the last number we have as of March 30; to be sure at the moment that would have been reduced because we were not working with a 54 on March 31. So, now perhaps the overvaluation will be reduced to like 2% or thereabouts. If it goes below 100, is there a seminal change in sentiment at all? Would that be some kind of a floor for the rupee? A: We discussed that earlier as you just mentioned. It’s not that everybody is looking at that data on a minute-by-minute or a tick-by-tick basis. But, yes, they generally serve as broad guidance, broad goalposts. I agree if it slides below 100, it kind of brings in some automatic stabilising factors. Do we need to go even higher in terms of dollar-rupee level? Those questions will get asked. There will be some counter balancing factors that are coming in. Q: Are you seeing any exporter supplies at all? In the past two days, all I heard was that supplies were coming from the central bank. But 54 is a damn attractive level. Aren’t exporters coming in? A: We are really not seeing exporters getting greatly excited. Typically, it’s a human psychology. When the moves are like this stretching in one direction, typically you will tend to hold back your sales. That is what is probably exactly happening. The moment it turns and it starts coming off then we will see selling by the exporters. But having said that, we are definitely seeing some queries in the longer tenure. When I say longer tenure, it is beyond one-year, basically two to three years segment. We are seeing some inquiries coming in. _PAGEBREAK_ Q: What exactly are you making of the RBI intervention at this point in time? When there was that sharp amount of depreciation in December, they did step in with some amount of measures. Do you expect the RBI to be as aggressive at this point? How have you seen the RBI intervene in terms of your interaction with traders etc.? Were they there today? A: Today, I won’t be able to say. But, yes, they have been intervening off and on. Unlike December, here it is pretty much flow driven. So, the moves are fundamentally driven by flows. I don’t think you can intervene much and make much of difference. So, the scenario is slightly different as opposed to November and December. Q: May 7, once we do get some amount of clarity on GAAR, do you think that the rupee could turn the corner and start appreciating or do you think that we are just going to be pretty much range-bound and on a depreciating trend? A: I would like to believe that. The fundamentals are not necessarily that strong. Hence, the bias towards weakness will remain. But, yes, May 7 and May 8, we have to watch very closely. There is a decent chance that we may get some good news out there, some softening of stance, some watering down of the original provisions. And that can bring back some cheer in investor sentiment and reversal in dollar-rupee also. Q: You may be talking to a lot of FIIs as well. The feeling, one gets from some fund managers, is that they have reacted to neither positive nor negative news. For instance, a fund manager was pointing out that after the Infosys numbers, most of the FIIs didn’t sell, the fear being that we don’t know how we are going to be taxed. Even when you sell, you may be making profit over some gains. I know it’s difficult to believe that people made much gains in the last one year, but the fear was that because I don’t know my tax liability, people didn’t act. So, if clarity comes, will people actually go out and sell stocks you think? A: For that, we have to wait actually what comes out on Tuesday. Is it just a mere deferral or is it actually significant watering down of those provisions? It’s difficult to hazard a guess now. But I agree with you that markets have been holding amazingly well inspite of all the bad news that’s getting thrown at, still it’s holding and 5,150, for example, is still holding. The 200-day moving average is holding. Broadly, even global financial markets, it’s not like giving way. Actually the risk is on other side. If we have some good news coming in, though again the chances of that maybe rather low, we can actually have a short squeeze and maybe very sharp short covering also. So, we definitely we have to keep that scenario in mind. Q: In that context, the weekend news, French elections, if Hollande were to win, what scenarios can you paint for the euro-dollar on Monday? Given both scenarios either Hollande wins or Sarkozy wins? A: There again quite a few things are happening. Non-farm payroll is coming out today evening, then obviously French elections are there, then Draghi’s statements are there. So, I don’t put too much importance onto just one even or one factor because quite a few push-pull factors are working there. However, broadly if you ask me, my bias would be probably a lower euro. But again there also I am surprised I must say that it has been holding pretty well.