Rexit not too negative for rupee; year-end target 68-69/$: Pros

With the Reserve Bank of India governor Raghuram Rajan set to exit in September what will be the impact on Indian currency market is the big question.QI Gao of Scotiabank says there could be short-term negative impact on the rupee but with forex reserves in India on the rise to about USD 360 billion, it will provide a buffer to the rupee.As a near-term impact, he expects the rupee to top the May high of 67.8 to the dollar, while downside could be around 66.3 to the dollar. However, his year-end target is 68.8/USD with or without Rajan. He is also not overly worried about seeing major outflows from debt markets because of Rexigt but says one could see a near-term negative impact. August and October RBI policy could be the key. According to him, the new governor could be pro-growth and may cut rates in October.Paul Mackel, Managing Director-Head Of Asian Currency Research, HSBC too expects the rupee to be around 69/USD by year-end and at similar levels by end of FY17.Although the departure Dr Rajan would be unfortunate there are other positives for the currency markets like positive current account deficit and capital inflows, also the fact the next governor could also be a crediblke person, which market could take it optimistically, says Mackel.Below is the verbatim transcript of Qi Gao and Paul Mackel's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: How will you look at the impact of the Central Banker's exit on the Indian currency?Gao: In the short-term we are seeing it could be a negative knee-jerk reaction in local market including rupee.However, today we see a steadier market sentiment. This could be an impact as Indians and foreign reserves have risen to more than USD 358 billion from about USD 270 billion three years ago, we think it will provide a buffer to the Indian rupee and rest of this year we will just see a relatively small movements.Sonia: The foreign reserves of USD 360 billion could provide as a buffer to the rupee. So in the near-term, what do you see as the movement of the rupee? We are currently at 67 per dollar, over the next three months, what could be the range be?Gao: In the next three months, I think the top could be 67.8 per dollar, which is previous high we saw in May. The downside could be 66.3 per dollar level. Our year-end forecast is 68.5 per dollar.Latha: With or without Rajan?Gao: Yes. Latha: Are you also a bond dealer because ever since Rajan became Central Bank governor, India has got record inflows into the debt market, would you think that those debt investors will want to cash out a bit?Gao: I think in the near-term there could be some negative because the announcement may spur some foreign investor worries. I think we see increasing chance of 25 bps rate cut in October because the new governor may be more pro-growth and the normal monsoon rainfall could ease the inflationary pressure.Latha: So you expect people to stay put, no worries?Gao: Yes. As the market continues to expect a rate cut, we could see capital inflows even though there could be some short-term outflows.Sonia: We were speaking to a currency expert and he indicated that there won't be too much of a fall in the rupee because of the foreign currency reserves that the Reserve Bank of India (RBI) has to the tune of almost USD 350 billion. Is that the sense you are getting as well and what do you see as a near term trajectory for the rupee?Mackel: The near term trajectory is that the currency is likely to weak and there is some uncertainty on the matter what has happened over the weekend and there is going to be a bit upsetting for the currency at least in the short-term, but I definitely agree that there is a huge stock of firepower that the RBI has now in the form of foreign exchange reserves to smooth or manage excess of currency fall, if they need to.Latha: How do you look at the trajectory from here on up until the end of the year? Governor Rajan is there for the next 75 days and thereafter comes those foreign currency non-resident (banks) FCNR(B) deposit some USD 26-30 billion that will leave the country. We are given indication by Rajan in his exit letter itself that all arrangements are in place for that event as well but for a longer term the stabilising factor of the rupee which is Governor Rajan is not going to be there after September. How would you look at the currency in a longer term, yearend and maybe financial yearend of March 2017?Mackel: Our view is that the currency can still gradually depreciate, so we have yearend view of 69/USD and even into the end of the financial year we would have a wraparound those levels too. While his departure if quite unfortunate. We still have to bear in mind that there are number of positive factors for a currency that is still very much in place; the current account deficit, there has been meaningful capital inflows in the forms of foreign direct investment that are quite supportive for the currency from the balance of payments perspective. So yes, his departure is maybe not the best but on the other hand we also have to see who is going to take his place and if we do get quite credible person coming in then market could certainly think very differently and optimistically.Latha: What you would expect the bond guys to do. I know you head the currency market but you will have to keep one eye on what the foreign bond guys are doing. They were the ones who pumped in more money than the foreign institutional investor (FII) equity investors. Would they worry that the inflation warrior is not there, so in the long-run there are less gains or would it be the exact opposite that you would actually have a rate cutting Governor next?Mackel: Absolutely. I think he hit the nail on the head that we have to watch the flows from the FIIs if they start to become uncomfortable with this uncertainty now at the RBI. However, if we start to see the signs of the money flowing out on the fixed income side for example there will be another source of concern, but it is important, I believe that you have some degree of policy continuity continuing and that is very important that this continues, otherwise these types of investors could becoming increasingly nervous.