Go long on rupee, profit-taking to last short term: Experts

Amid speculation that the Fed may hike interest rates from middle of this year, dollar has strengthened against euro and yen. However, the mood in emerging market, including India, remained skittish owing to mounting pressure from risk aversion.

With rupee trading at 2 month low against the dollar, Rohit Arora, EM Asia Interest Rates Strategist at Barclays and Nizam Idris, Head of EM Forex Strategy at Macquarie explains the key levels to watch out for.

Below is the transcript of Rohit Arora’s and Nizam Idris’s interview with Ekta Batra and Anuj Singhal on CNBC-TV18. Ekta: Can you just tell us what your sense is on the rupee considering it is at a two month low? What is resulting in the pressure that we are seeing on the rupee and how much lower do you think it can go? Idris: In the middle of last week the market was pretty long on the rupee and right after the Budget, which was followed by RBI cutting interest rates, Dollar-Rupee just rebounded.It feels to me the market was just booking some profit but that rebound has since been morphed into something else really because the dollar has strengthened further. So if your look,  dollar index is pretty high right now, Euro is below 1.08. Dollar-Yen today hit a new high so, it is a combination of those two factors and at current level it does not feel like the Rupee is particularly weak relative to the rest. Anuj: Indeed, that is the point we should take forward. On the day of rate cut, we saw the bond yield go to 7.65 percent and at that point it looked like 7.50 percent would be here sooner than we expect. But things have changed after that and now there is this fear of a rate hike from the Fed maybe in next three months or so. What is your sense now, do you think that the best of bond yields might be behind us in terms of softening or do you think that we will still see a move towards 7.50 or lower? Arora: Certainly from the perspective of bond markets we think they are still in a secular bull market and we still see yields going below 7.50 percent by the end of the first half of the year. The reason behind that is not only rate cuts. What we are seeing in the domestic bond markets is that there is a significant shift of household financial savings which is happening. So, what we saw say between 2009-2013 was that physical savings were rising, as a result the financial savings which used to be around 11-12 percent of GDP, they went down to 8 percent but now with real rates higher, property prices not performing and gold prices declining we think there is a significant capital or a strong bid for INR assets which will continue in the next couple of years. Second what happened on the day of the RBI policy meeting was there was I would say more of a near term profit taking because what investors took away from that intra meeting rate cut was that that might be the April cut preponed to March and what that means is that we are left with three months of no rate cut. So, as such that combined with fiscal year end coming soon and supply beginning in first week of April, there were some other mixed factors which drove that profit taking move. But we expect yields to start declining again from early April. Ekta: What is your prognosis when it comes to further Foreign Institutional Investors(FIIs) inflows into the debt market? Will it be as robust as say what we saw in the last year and this includes the corporate bond market? Arora: The robustness is of course dependent on if the FII limits for government bonds; will it be opened up or not. In terms of corporate bonds we think certainly the demand will remain strong, may not be as high as the last year but the trend inflow of USD two billion per month is more likely to continue until we reach the 90 percent FII quota target for corporate bonds as well. This is again driven by the realities; the INR is still one of the most attractive fundamental currency with lower volatility across the EM universe and given the lack of alternate assets, that demand is going to continue. Anuj: Do you share that thought? Do you think the kind of inflows we may still see in both equities and debt market will eventually lead rupee higher than where it is right now? Idris: Yes absolutely, the reforms story is still quite compelling and the rupee, is the strongest currency really. RBI has been intervening quite a lot over the last few months while maintaining tight monetary policy. Debt policy is slowly changing and that is also likely to be accompanied by some stability in inflation and even as the RBI could cut interest rate, the RBI could also look to allow the currency to appreciate to curb some important inflation as well this time around. So we maintain a lot of positivity on the rupee although like I said in the short term the dollar strength could actually trigger some profit taking. It could be multi-days but we maintain to look to an opportunity towards long the rupee again, for now 63 will cap pretty nicely. Ekta: So, you don’t expect a sharp fall in the rupee or anything that we have seen in other emerging market currencies say something like the Brazilian Real at 11 year low or maybe the Turkish Lira at a record low; you do not foresee any sharp deprecation in the rupee or appreciation so hence maybe range bound is what we could see? Idris: The situation in India is quite different from Turkey and Brazil. Brazil has an issue with reform being put on back burners because of a lack of support from the parliament. Turkey has a issue of Central Bank becoming less independent as the government arm twists the Central Bank governor. So those sort of factors would definitely impact confidence in a big way. In India it is quite the opposite in my view; the reform momentum is still in place albeit looking pretty gradual. Also Central Bank governor’s independence as well as credibility seems to be at a cyclical high right now and therefore at the minimum given dollar strength we could see some stability in Dollar-Rupee in the short term but once that dollar story fades away then Dollar –Rupee can come of from where it is right now.