Rupee can depreciate to 65-66/$: HSBC's Paul Mackel

A: Well, we have felt that actually some of those underlying factors that had been keeping the currency relatively stable, seem to be fading away somewhat and indeed market participants have been looking at the Indian rupee with maybe a little more of a pessimistic view and I still see this depreciation bias working against the currencies slowly through the course of this year.

Anuj: In that case, do you think 65, 66 is a reasonable chance in the near term?

A: Well, there is a lot of uncertainty as we know that in the months of May and June, markets can be quite unsettled globally.

Say for example continued steepening of the US treasury yield curve, then I would imagine that many currencies in Asia wouldn’t trade so well, so I do think that there are certain things to consider in the near term which can undermine the rupee further, so I rule out a move to 65 or so.

So, while our view is still 66 for the end of this year, we cannot be too pessimistic because there are still obviously some positives there.

If you think about the current account deficit it should remain relatively narrow going forward despite the way that oil has actually come up from the lows.

So we can’t be too pessimistic, we just need to say to ourselves that some of the positives that we were so excited about six months or even three months ago are maybe not as strong as they used to be.

Ekta: So you are estimating 66 but do you think that by after the year end maybe next year or maybe getting to 66 or averaging at 66 we could touch the all time lows for the rupee or that pessimism is not warranted at this point?

A: Well, I don’t think that pessimism is warranted at this point. The policy framework in India is still quite sound and prudent when you are thinking about the leadership at the central bank and also the right way the government has been moving, so I don’t think that the very violent moves for the rupee that we saw back in middle of 2013 are really warranted. Those days are gone and why is that?

Again it goes back to what I said about the current account position for India is a lot better than what it used to be, so the inherent vulnerability in the currency that can generate significant currency volatility is still quite low.

Anuj: What is your call on the dollar now? We have seen volatile moves in dollar-euro equation as well and for the dollar index as well. From here what is your call?

A: That is a good question, what we have been saying for at least over a month or so is that the market needs to reassess some of the drivers behind dollar strength and that has been the right thing to do particularly versus other major currencies and why is that?

Because the data certainly has been disappointing, inflation is still quite low, the Fed was starting to get a little maybe nervous or cautious about dollar strength, so we have seen the dollar weaken versus other major currencies.

I don’t think it will be sustained, we are still targeting euro-dollar being down by down at 105 by the end of this year and as that comes through it probably means that Asian currencies and Indian rupee will also start to weaken a little bit versus the dollar as the Fed hike story starts to matter a little more. But maybe that is not so much a big story at the moment but come later this year, the big dollar will start to get stronger again.

Ekta: I am sure you must be looking at this equation quite closely and if you could explain it to us, you did touch upon the US 10-Year which is now trading above round about two and a half percentage levels and even the German bonds which have hardened, which have hardened. What is the correlation that we are seeing globally in terms of the bond yield trade which is taking place and how is that affecting emerging market bonds and maybe even currencies?

A: What is happening-first of all going back to when I said about reassessing the US dollar bond market, in general that has permeated into thinking of other asset classes and positions and my colleagues have been of the view that there is going to be a risk that the US treasury curve would steepen somewhat and that has turned out to be exactly right. If that continues though, what tends to happen is that type of nervousness at the longer end of the bond market can actually translate into uncertainty in the currency market particularly for higher yielding currencies.

So it is something that we are watching quite closely, sure to continue this volatility in the core bond markets and that would be a drag on the Asian currency outlook including the Indian rupees.