Rupee fall not data-based but due to weak sentiments: HSBC

Despite the improvement seen in October trade deficit data, the benchmark Indian indices and the rupee continued to trade on a weak note on Tuesday. Speaking to CNBC-TV18 on the same, Hitendra Dave, head of Global Markets, HSBC India said, at this point of time, consumer confidence is totally missing from the currency the market, so the RBI and the government need take some steps to improve this sentiment.

According to him, the apex bank has to recognise that the current weakness in currency is not data-based, but on persisting poor sentiment from June-August. Once they bridge that gap, the fear of India being at the forefront of the weak currency list, will cease to exist, he added.

Also Read: Mkt consolidating, not correcting; weak rupee good: Expert Below is the verbatim transcript of Hitendra Dave’s interview on CNBC-TV18 Q: It’s quite apparent that the positive trade numbers have not had much of an impact. Do you think that we are in for a goodish bit of beating on the rupee? A: On the currency side, to the extent that current account or the trade deficit numbers have a bearing on the exchange rate, the data has continued to surprise on the positive side for the last three-four months now starting from April-May, when we were looking at trade deficit number of USD 17 billion to USD 20 billion a month and therefore, monthly current account numbers between USD 8 billion to USD 10 billion a month. We have now come to a point where for the last four-five months monthly current account is running somewhere between USD 1 billion to USD 2 billion a month. So, the fundamental block for currency stability is coming into place. Clearly, what is missing at this juncture is confidence or sentiment. I do not think most people around the world or a lot of economic agents in India believe that the currency has any prospect of stabilising fairly soon, unfortunately, the events of June-August are too recent for people to forget. We can point the data all the time and say we should be either stable or appreciating but the reality is that at this juncture sentiment and confidence are missing and that is something which either the central bank or other authorities have to work towards. Q: What about the bond market? There is almost a buyer strike out there as I have been repeatedly pointing out, 9 percent even without rupee scare; do you see bonds getting much of a support? A: I think on the fixed income market; this is a market which about three-four months back or so experienced in the midst of an easing cycle 300 bps hike and that is very recent; there are same traders, management and teams. That has shattered quite a bit of confidence and it is not going to come back soon. The unthinkable happened; the unthought-of levels of bonds and commercial papers (CPs) and certificate of deposits (CDs), all were seen by everybody in the market and that is the backdrop in which you are evaluating the bond market today. One is a fairly weak confidence trading investor community. That is one part and the other part is you have to ask the fundamental question; why do people buy bonds in the wholesale market; you either buy because you have a regulatory requirement from a bank perspective, statutory liquidity ratio (SLR), insurance perspective, whatever the Insurance Regulatory and Development Authority (IRDA) guidelines are or from pension fund perspective the investment guideline or you buy because you have a positive view on the monetary policy cycle. Also, you buy because you have surplus liquidity. None of these three exists today and then you have Rs 15,000 crore supply every Friday. You have this supply and none of the three requirements to buy bonds exists; there is only one possible outcome which is that bonds yields head higher; you would expect someone to adjust one of these three things, reduce the supply which is not possible given the fiscal situation, create sources of demand, which is what the Reserve Bank of India (RBI) has done for the last three-four years or add to liquidity so that at least there is internal reason for the system to buy. The market right now is spring on hope but every time there is a bit of negative news, Federal Open Market Committee (FOMC), non-farm payrolls (NFP), rupee, I do not think bond yields are impacted that much by the external sector at this juncture but its just the lack of internal confidence and lack of any prime motive for people to start thinking otherwise. At 9 percent, most people would believe that there is inherent value but there is no confidence to be able to express that view.

_PAGEBREAK_ Q: What about rupee? Do you see lower levels on the rupee now because for the last couple of days there has been some fear of tapering of the RBI’s swap with oil companies along with the way the dollar index has moved? So, it’s a double whammy of sorts. Do you see the rupee head lower? A: As far as OMC is concerned, ultimately that is captured in the trade deficit numbers or the current account deficit numbers. So, whether in a sense without the oil companies present in the market from an Fx market been running a substantial surplus despite that the currency in the month of October was largely stable and its weakened a bit right now. The issue is if the central bank or other authorities believe that the building blocks for fundamental stability of the currency are in place then they need to walk the talk because the bulk of the weakness in the currency takes place while we are sleeping. Therefore, either you have to say that move is irrational, it is based on wrong assessment of the fundamentals and based on fundamentals this is where it should be and therefore, you need to be there continuously till the domestic key players start believing it. In the absence of that you are still very much in play as you were in June-August. The reasons for that do not exist anymore. In June-August you were coming off two months of very large current account, you had trade deficits, you had very large debt ownership and you had a very wrong positioning. At that time, you were coming of a period where everybody was bullish on the rupee, so people were short dollar against the rupee. To that extent as well as fundamentally, the reasons for the kind of things that we saw in June-August do not exist but because it was so recent and because the confidence is low and the sentiment is weak and people are much more willing to give credence to the potential negative news rather than to the current – a positive data, somebody has to address that gap. Q: Do you think if there is a dollar spike with the index going to 82 or 83, are we going to see India being the worst performer in terms of currencies? What are the levels you are prepared for on the currency? A: I think the probability of that is quite low for the simple reason that the central bank is much better prepared; (a) you had a bit of life run just recently and authorities have had time to reflect back on things which they should have done, should not have done, could have done better, (b) reserves have been built-up in the last two months quite a bit and the foreign currency non-resident (FCNR) and the other window plus also through certain amount of buying to cover for the oil sales that they are doing. The natural leakage that happens in dollar demand supply mismatch through a wide current account doesn’t exist. So, I would expect that if the authorities wanted to, they could stop it in a much forceful manner this time than they did in the past. Also, the central bank has to see that a weakness which is entirely sentiment based, they have to step-in; weakness which is based on large current accounts and capital outflows that they have to accept as a part of the system. So, once the central bank recognises that this current round of weakness is not based on data, not based on fundamentals but on persisting sentiment which is still living in June-August period, once they bridge that gap, the case for us to be at the forefront of being the weak currency list, doesn’t exist anymore.