Rupee correction healthy; see 64.5-65/$ in near-term: StanC

Rupee hit a 20-month low on sustained dollar buying by foreign institutional investors (FIIs) and global rise in yields also prompted some emerging market currency weakness.According to Ananth Narayan, head-financial markets, Standard Chartered Bank says triggers for depreciating rupee have been both domestic and global. However, he terms this as healthy correction. "It is good we are having a soft landing," he says.Domestic factors like growth constraints, lack of revival in investment climate, weak earnings and global factors like rising crude prices, sharp moves seen in European and US debt markets make a strong case for rupee to depreciate to levels of 64.5-65 to the USD in the next few weeks, said Narayan. He does not see a run away fall for the rupee unless crude rises to USD 80-90 per barrel.With USD 70-80 billion net long rupee positions having built over the last few months, it makes a strong case for volatility and vulnerability, feels Narayan. The 10-year bond would remain range bound, he said.

Below is the transcript of Ananth Narayan’s interview with CNBC-TV18's Latha Venkatesh and Reema TendulkarLatha: Why the sudden weakness, we were ranked outperformers for so long now although this is welcome weakness but why?A: There is no shortage of triggers at the moment. It is true that it is a twenty month low, but frankly that is only half the headline. The reality is the world has moved on in the last 20 months. The dollar index was 80 in September 2013 and today it is at 94. So, clearly over the period of last 15 months or so there has been some amount of complacency that has set in the markets on the back of improving macros particularly lower oil prices, low FX volatility, high interest rate differentials and a whole host of other things. We think a whole USD 70-80 billion of net long rupee positions have been built up in the markets over the last few months. Now that clearly builds in for volatility and for vulnerability eventually. It is good we are having a soft landing.The triggers particularly at the moment are both domestic and global. We have seen consolidation in the oil prices and clearly lower oil prices have been the biggest positive for India. This year the loan is about 17 percent high since the beginning of the year and in the last few days we have seen all sorts of markets consolidating, the debt markets in Europe and the US have seen sharp moves as well. So these are global triggers. Domestic triggers are there as well; growth is clearly a huge constraint and a problem for us, we are not seeing a revival of the investment climate, the quarterly results were absolutely awful. Leverage and bank balance sheets were stressed. So all of that still remains and frankly that part still remains a little murky going forward as well.So, put these two together there is every case for a correction to maybe 64.5-65 in the next few weeks and as you said this is probably a healthy correction. As the Governor said it is good to have a small accident rather than a big one later on, bring down the complacency, increase the volatility and the perceived cost of hedging and therefore build a more stable system.Reema: So if we do depreciate to 64.5 to 65 over the next few weeks will the rupee sustain at those levels, should that be the new normal we should assume the rupee till the year end?A: Yes, as a base case we will see a correction rather than a sharp run away fall. At one point of time the real exchange rate (RER) showed 113 which is 13 percent overvalued for the rupee. It has now come down to about 109, 9 percent overvalued after all these moves you have seen globally, and with the rupee taking it up to 65 will still bring it in the six to seven percent overvalue which is fine.Let us not forget the base case and the core of the economy is a lot better than it was two years ago. Reserve Bank of India’s (RBI) coffer are a lot stronger as well, the ability of theirs to control markets is quite large. So I don’t see a runaway move as such, 65 will be a healthy correction and after that we should see a gentle depreciation rather than any sharp moves. Of course all bets are off if you see oil prices shooting up to USD 80-90 per barrel which we don’t expect but barring that things should be under control.Latha: If oil goes above USD 75 per barrel, is there are psychological level where people worry and the second question what does RBI do in June - higher oil prices, rupee has weakened, the net impact of traded Wholesale Price Index (WPI) will obviously begin to rise.A: Oil is the single biggest factor I would personally look at. Clearly, every single dollar of change in oil price means a billion dollar change to our current account and the Budget is at USD 70/bbl or so. If it goes to that USD 80-90/bblrange I would start to get worried because that is where a lot of key equations start to change. Going forward, for the policy the RBI is in a tough spot right now. Clearly with oil prices looking iffy, with the inflation prospects looking iffy with monsoons, with food prices and given that we have bound ourselves to a one and half to two percent higher than the headline Consumer Price Index (CPI) inflation which frankly doesn’t give too much of room for rate cuts - going forward the path remains pretty murky unless CPI estimates themselves come off.However, the reality is there are other crying requirements for lower rates, the fact that we have a slow growth, the fact that we have a stressed corporate sector crying out loud for lower rates. Looks like that stuff is going to be tough to come by and the current volatility of course doesn’t help.

Latha: 64.30-64/USD plus on rupee for this week?A: Somebody taught me very long time back; don’t give a price target and a time target at the same time. 64.5 – 65 to the dollar is imminently possible and it could be healthy. It is nothing to worry about. Typically, markets tend to overshoot, so I wouldn’t be surprised if it shoots out beyond that as well but the ability of RBI unless of course oil prices change to bring down markets to more sane levels to 64.5/USD or so is pretty high.Reema: The 10-year bond after being in the range of 7.7 to 7.8 percent, we have started climbing higher along with the rest of the globe but from current levels of 7.92 percent  what would be your forecast in the ten year?A: A lot of the factors that we mention for the currency apply for the bonds as well. We are watching the oil prices and commodity prices very closely and global movements in bond prices very closely. Last week has been pretty active in that sense. The monetary policy uncertainty remains. Some people are still calling for a rate cut in June but beyond that seems very murky. Having said that there are a couple of hopes that we have for the future, one is of course let us remember the Foreign Portfolio Investment (FPI) limits have been pretty much closed, that could get opened up at some stage, that could provide some welcome relief to the bond markets.Secondly, a lot of people are calling for CPI to come off even further. Hopefully, the secular trend we have seen in the past this is currently a correction rather than an actual reversal. If the commodity prices start to move southward again that would give us room for the rate cuts as well. So, it remains in a range until we get the data and the clarity but there are a few things to watch out for including oil prices and the FPI limits being opened up.