According to Ananth Narayan of Standard Chartered Bank, rupee depreciating further to 64-65 per dollar will not be a big move and will help exports. A gentle depreciation should be the base case for the rupee, he adds.
The Indian rupee fell to 63 per dollar on Thursday. Ananth Narayan, Head, Financial Markets, Standard Chartered Bank, says the rupee did not keep pace with dollar strengthening against major currencies.
According to him, rupee depreciating further to 64-65 per dollar will not be a big move and will help exports. A gentle depreciation should be the base case for the rupee, he adds.
Below is the verbatim transcript of Ananth Narayan's interview with Ekta Batra & Anuj Singhal on CNBC-TV18.
Ekta: We have breached 63/USD on intraday basis. How important is the 63/USD level according to you and do you think that we could see a pullback intraday as well?
A: It is an important level, a physiological level that people are watching but over a period of time one has to put things in perspective. The reality is there has been growing vulnerability in the positioning of the rupee. We have seen more and more people going long the rupee, short the dollar both domestically as well as globally in the form of foreign institutional investors (FIIs), foreign portfolio investors (FPIs) flows open in rupees.
Domestically alone, we think about USD 40 billion worth of net long rupee positions could be build-up by exporters and borrowers in foreign currency unhedged basis since the past 15 months. There is a vulnerability that has grown in the market and in the meantime the dollar has strengthened globally. It has moved a lot sharply since the second half of last year and the rupee has not kept pace to that extent. The Real Exchange Rate (RER) now indicates that rupee is 12 percent overvalued. This means is that whenever you have domestic or global events, we could be vulnerable to sharp moves on either side and 1 or 2 percent move is not large scene in this overall perspective.
The immediate trigger have been the soft sentiment because of the minimum alternate tax (MAT) issue amongst FII, FPI flows and now the new news that monsoon could be below normal, doesn’t help either. Globally as well there are lots of events like the US Fed and the Grexit etc. So overall this is ripe and vulnerable for a move on the rupee. I hope it is a mild one rather than a run away one.
Anuj: Two part question. You touched upon MAT issue but do you think this has a potential to drag the rupee even further from hereon and when you said the rupee is vulnerable and you hope it is not a big move. What’s at risk? Is 65/USD at risk, USD 67/USD at risk or is that something you are not looking at right now?
A: When the rupee is 12 percent overvalued on the RER, a 2-3 percent move cannot be ruled out. I think it could happen over time, it could happen in a short period of time as well. So 64-65/USD while it might look big and hit the headline and create a lot of flutter, in reality, in the overall scheme of things it is not going to be a big move and in many ways it could be good for the country. Already exports are hurting, of course it is difficult to say how much because of Fx but in a sense there is a need for us to catch up with the rest of the world.
How much of this is because of MAT and FPI. I think is difficult to pin this down. We are hoping that the MAT issue resolves itself quickly. There has been lot of dialogue between the government and various players; some clarifications came out yesterday which was helpful. Hopefully this will settle down and the long-term intent is not to create any confusion amongst investors, but as I said there are plenty of other issues which could crop up over the next few weeks between monsoons, between inflation forecast and global events such as US Fed and the Greek deadline on May 12, for instance, so a lot of events to look forward to.
Ekta: What is the range that you might be working with at this point with the downside scenario factored in as well?
A: The one year forward premium is still at about Rs 4.5, so that indicates that the market is looking at 67.5/USD one year forward rate. We think the rupee depreciation will be there but not to this extent. USD 64-65/USD cannot be ruled out. I think a general depreciation should be the base case. Let’s not forget there are long-term positives for the country as well; oil being where it is, is a huge real positive for us, saves a lot of money in terms of actual trade deficit and of course the growth prospects in the long-term with GST etc is also looking reasonably good, but having said that 65/USD or so in a year’s time seems most likely. We could see sharp moves, as I said the market is vulnerable for sharp moves. The other good news of course is that RBI reserves have gone up to an extent and therefore their ability to control the market is quite large.
Anuj: At what point would you expect big RBI intervention or do you think that is not necessary at this point in time?
A: That question is best addressed to RBI but if I was to put on the RBI hat, I think given that the rupee is already overvalued, it would take a while for me to do any large intervention. They might be there to temper a bit of volatility in the short run but I do not think they would be too upset with a bit of depreciation just to catch up on the RER.
Ekta: What about the bond markets because we haven’t seen it move much despite the news about the monsoon that came in yesterday. Is it focusing on the new ten-year issuance?
A: Couple of things. One, the credit offtake still isn’t great, so there is intrinsic demand for bonds, there is a lot of redemptions coming through as well, so banks will be buyers of bonds. At the same time the conviction that we will see deep and large scale rate cuts is also diminishing. The reality is the RBI has put 1.5-2 percent real rate over the expected consumer price index (CPI). At best one expects that about 5.5 percent by March next year. So maybe 25-50 bps of rate cuts more at the best and of course it doesn’t help that you now have uncertainty about the monsoon and there is also questions about what the MSPs and the minimum procurement prices will look like for agriculture. All that throws a fair amount of cloud into inflation outlook and to that extent I do not think market will be gearing quickly into one side or the other. It will probably be range bound and waiting for cues.The Great Diwali Discount!
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