The Indian rupee has fallen to a one-month low with banks boosting dollar purchases. However, Dominic Bunning of HSBC does not see aggressive weakness in rupee from current level.
He says at the moment, dollar strength is coming through and post the overnight comments from the European Central Bank (ECB) and India's trade numbers showing that deficit has widened out a bit with negative export growth and signs of gold imports remaining pretty high, a little rupee weakness was on the cards.
Below is the verbatim transcript of Dominic Bunning's interview with Latha Venkatesh & Anuj Singhal on CNBC-TV18.
Latha: What explains this weakness at a time when FII flows are coming in-in both debt and equity?
A: You are seeing some dollar strength coming through and actually across G10 as well starting with what was some comments from the European Central Bank (ECB) overnight and we have seen that translate into some broader dollar strength.
I think for India we did have the trade numbers from October coming out yesterday as well which showed signs that the deficit has widened out a bit with negative export growth and signs of gold imports remains pretty high. So, there are some signs that there is still a bit of dollar demand in the market and that is probably keeping dollar-INR relatively supported for the time being at least.
Latha: What is your sense about the RBI action? We are told that there is a lot of dollar purchased. How would you guess the movement of the currency up to December 31 and thereafter till March 31?
A: We do not expect INR volatility to pick-up as much as some would expect in the market. The RBI has made it clear in number of their statements that they are trying to curb volatility in the currency between 60-63/USD ranges versus the US dollar. We would expect that range to hold given that the RBI has a lot more policy flexibility now than it did in the past given the size of FX reserves, given that inflation has come down quite significantly and given the broader current account deficit. We do think that volatility will be managed by the RBI. We do not expect any aggressive rupee weakness from here.
Latha: The last real effective exchange rate (REER) number put out by the RBI, the much tracked index was indicating 10 percent rupee appreciation or over valuation, not appreciation as much as over valuation. Is that a number you track, is that a level that would worry you?
A: I think we need to be slightly careful in sense of how we interpret the REER. There are a number of different methods that we use to suggest that whether the currency is over or under valued on real basis depending on what timeframe we are using and equilibrium that we are using. I would say that in sense of what we are looking for – I think central bank has made it clear that they would like to keep the currency on a relatively less volatile path and they have the ability to do more so certainly it did in the past; I mean for sure if you do get another round of much broader dollar strength then the impetus to curb rupee weakness by the central bank may not be quite as strong if the rest of region is weakening as well, but we do sense that the broader range will hold for the time being and the INR to some degree outperform number of Asian currencies at the end of the year.
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