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Last Updated : Dec 06, 2016 07:19 AM IST | Source: CNBC-TV18

A lot of reason to be cautious on rupee in medium-term: StanC

The Reserve Bank of India will be sensitive to dollar-rupee movement and correction on account of November 8 US presidential elections, Ananth Narayan, Head-Financial Markets, Standard Chartered Bank, told CNBC-TV18. There is a lot of reason to be cautious on the rupee, he added.

Despite the resurgence of dollar strength globally and the developments in Europe such as Italian referendum, the dollar-rupee equation may stabilise in the short term, according to Ananth Narayan, Head-Financial Markets, Standard Chartered Bank.

The Reserve Bank of India will be sensitive to dollar-rupee movement and correction on account of November 8 US presidential elections, Narayan told CNBC-TV18. In the medium-term, however, there is a lot of reason to be cautious on the rupee, he added.

Beside global markets are looking extremely uncertain due to factors like “Trumponomics” and in times like these, investors should look to use the stability to buy insurance and reduce unhedged exposures.


Going ahead, the money market will focus on Monetary Policy Committee’s (MPC) policies, he said. RBI’s MPC is slated to meet on December 7.

Below is the verbatim transcript of Ananth Narayan's interview to Latha Venkatesh, Sonia Shenoy & Anuj Singhal on CNBC-TV18.

Anuj: The headline was that rupee at all-time low but we all know that it has been a strong currency just like the dollar has been stronger but from here on nominal rates what is the trend?

A: Dollar-rupee in the short run will probably stabilise a bit despite all the news that we are hearing from Europe and despite a bit of resurgence of the dollar strength globally and the reason for that is a few numbers. One is of course the foreign currency non-resident (banks) FCNR(B) repayment is done and to that extent that temporary volatility that we saw is done and dusted. Second, we have also seen some corrections since November 8 elections to 2-2.5 percent and to that extent RBI will be sensitive on how dollar-rupee moves from here. Having said that in the medium run there is a lot of reason to be cautious on the rupee. The fact is we are 17 percent overvalued on real effective exchange rate (REER) terms. I know REER is a bit of an anachronistic measure but it still tells you that the rupee has ways to move and the rest of the world has moved forward. Second, we still have an overhang of unhedged currency exposures, which makes us a bit vulnerable to sharp moves and third, the global markets are looking extremely uncertain across Trumponomics, across what could happen with barriers, an inward looking polity trends for global growth and trade, all of it is looking extremely uncertain. In times like this one should use stability in the market to buy insurance and to reduce unhedged exposures.

Latha: Money markets - where do we go from here. What is in the money market's thinking now in terms of the cash reserve ratio (CRR) rollback? Will it happen on December 7, how much will happen and if you are going to get competition from 6 lakh crore of Market Stabilisation Scheme (MSS) bonds, is there a ceiling to how much 10-year can rise, how much the 10-year yields can fall?

A: The money market will focus on the next two days of the monetary policy committee (MPC) meeting and the results thereof. However, these are tricky times for both the MPC and the market as a whole. We do seem to be getting different indicators or different impulses in the short run versus the long-term. In the short run there is a shock in the system, growth will be softer, liquidity is high, inflation could be softer and one could argue for the need for transmission for lower rates, for lending to take a fillip both into consumption and into investments.

In the longer term though there are several uncertainties one is grappling with. We cannot ignore the fact that global rates have shot up since the US elections. We cannot ignore the fact that Organisation of the Petroleum Exporting Countries (OPEC) has happened last week and that does augur for stronger energy prices going forward. We cannot deny the fact that the globe looks extremely uncertain going forward though we have US resurgence and reflation or do we have barriers to trade and funny geopolitics meeting that global trade and growth comes down. Let's not forget there are lots of vulnerabilities including pockets of the European banking system, Chinese banking system and all of that. So we are pulling in two different directions as far as what that implies for India's concern and frankly the MPC has a bit of a call to make to make tomorrow and day after.

Latha: The market has decided that at the moment Italy is not a risk. You think the call will remain that way. We shouldn't expect any serious wobble in euro, in banks and therefore global financial markets?

A: It is a personal view but I do think the market was prepared for this kind of an outcome, in fact the Austrian election having gone against the Right Wing ways is probably a bit of a positive surprise now but Italy had pretty much been factored in, so to that extent the dollar strength that we have seen over the last few weeks build-up, I think already factors in a lot of the negativity. The medium tone though still looks extremely uncertain, let's not forget that in April next year we have the French elections thereafter we will see the Alternative for Germany (AfD) make its opening in the German parliamentary elections. Netherlands is up for election as well. So whole host of inward looking populist politics seems to be gaining ground and that doesn't augur well for global growth or trade.

On the flipside you also have US rates having gone up sharply on the back of expectations of US inflation and consumption investments coming in from the US. So it does look pretty uncertain, eventually the trend towards stronger dollar might resume, for the moment a lot has been factored in, the market is positioned either long or square on dollars and we probably won't see any short-term move, long-term still looks like a dollar uptrend.

Anuj: The equation that has been discussed long, parity on dollar euro. Do you see that happening in 2017 and maybe even lower than that?

A: I think it is a possibility - that's not the official call of my bank but I do believe that over the course of the next year or two years, we could see this trend gaining ground and indications are there; if you look at the data coming in from the US including the non-farm payrolls (NFP) which came out on Friday, it does indicate an economy which is doing reasonably well which is close to full employment, which has room for investment consumption to build-up and Europe still looks wobbly given the uncertainty and almost existential questions being asked in some countries. So to that extent dollar strength will continue but in the short-run a lot of it is probably factored in, market is already sitting long dollars to a large extent and therefore the muse right now might be muted.

Latha: Equity investors have been factoring in good margins for banks because of CRR inflow. The intent of the government seems to be that there is a hurt from demonetisation at least in the near term, let banks, RBI and government take 1/3rd each or share it. So should the equity investor now stop factoring in gains from demonetisation on bank profit and loss (P&L)?

A: I think the first indication will come from the policy which comes out tomorrow and day after. What I am hoping for is a clear annunciation that liquidity will be kept surplus for the foreseeable future given that fact that we are in under extraordinary circumstances while the rest of the market is factoring in 25 bps or 50 bps rate cut, I think the same could be achieved if we categorically state that the liquidity will be kept surplus, i.e. reverse repo will be the norm rather than the exception that we move away from liquidity neutrality of the April policy and maybe we accompany that with reverse repo rate cut rather than repo rate cut. It would make sense in the current context where we do not know about the long-term future but we want transmission to happen in the short end and that can be achieved with surplus liquidity and with lower rates being the operative rates for the short-term.

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First Published on Dec 5, 2016 11:21 am
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