Rupee fall not a shocker; see weak opening tomorrow: Pros

Q: The rupee so far has been a picture of stability and within the last 48 hours look at what has happened. Of course a lot of it on account of global cues and global factors but do you believe that the move on the rupee has perhaps been exaggerated and overdone?

Gautam: We believe that rupee was actually poised to weaken a bit because rupee cannot be insulated from what else is happening around the world and we have been seeing the dollar strength across against most of the currencies and specially against the emerging market currency though rupee’s fall has been insulated by the huge inflows of around USD 32 billion which we have seen both on the equity and debt from April 1 onwards.

So, this kind of dollar inflow has actually helped rupee to stem its gradual or maybe sudden fall. But in the last two or three sessions what we have been observing is that there has been some kind of profit taking both in equity and debt and probably this could be because of the calendar year and pressure from various fund houses who have invested in India to take their money back, so that could be one reason.

Today’s move which was triggered by yesterday Russia actually hiking their key rate to 17 percent to stem the fall in the Rouble and that actually had a risk suddenly across the emerging markets and the rupee probably took the cue in the opening trade when it started with the weakening of 31 paisa and since then it continued to weaken across and if we see right now where the non-deliverable forwards (NDF) market has been trading probably I believe that we might see tomorrow again weakening continuing because right now NDF was trading on the spot basis at 64.10 so probably tomorrow also we might see opening where rupee will be weakening further.

Q: How much weaker do you believe the rupee can get because you are absolutely right. It cannot remain isolated and it is not just the rupee pretty much every currency specially in the emerging market basket has reacted today on the declining side but how much more weakness do you anticipate and where do you actually see the pull back coming in?

Gautam: In rupee we have been seeing a very typical behaviour. When it gets stuck in a range then either side when it moves the other side players go away. On that front let me just tell you that rupee was not able to breach Rs 62/USD for a long time and that was the time when importers were not coming and covering themselves but the moment it starts weakening that is the time when we see the rush of importers coming in and the exporters who have to come and bring in their dollar they stay away. So this is a very typical behaviour.

Many a times they all believe that the Reserve Bank of India (RBI) will come and try to smoothen this fall or either way the movement but at this point of time we have not seen much of action from RBI though intermittently there were signs of the presence of the Reserve Bank of India but if they stay away I believe that rupee could go beyond Rs 64/USD and on a technical side. We have been checking at the typical level which was at Rs 64.85/USD that seems to be very crucial to me. I am not saying that is going to come very soon but if we do not see some kind of dollar supply coming in then probably this kind of move will see rupee moving towards that direction.

Q: The equity market is also reacting to the news that is coming in from the global markets. Sharp sell-off being seen today, 27,000 been broken for the Sensex and it looks like 8000 may be in danger as far as the Nifty is concerned. What do you make of the fall and do you anticipate further weakness from these levels?

Verma: I have always maintained that currency markets and stock markets are inextricably linked and currency markets being more nimble footed are a precursor to how equity markets will behave. I am not particularly surprised at the ferocity of today’s fall because last Thursday on December 11 the Russian Central Bank had raised interest rates from 5.5 to 10.5 percent. So, I don’t think the increase to 17 percent odd is what spooked the markets.

I think both currency and equity markets can digest volatility but what these markets cannot digest is unpredictability. I think less the ferocity but more the unpredictable nature of how the whole rouble crisis vis-à-vis the dollar has panned out, I think that is what has spooked the markets.

Where I disagree with Ashok is that I find it very hilarious when people say rupee will head to 70 per dollar. Forget 64-65 per dollar, I have heard people crying wolf and saying rupee is headed to 70-72 per dollar. I don’t subscribe to that school of thought because don’t forget that on May 23 this year the rupee had hit a high of 58.33 to the dollar and at that point even at 60 per dollar the whole world was saying that rupee is overvalued and we need the Reserve Bank of India (RBI) to step in. Today when the rupee is at 63 per dollar everybody is saying why has the rupee weakened so much?

So, as I see it the RBI is singularly responsible in fact Raghuram Rajan is perhaps happy at the state of things because between January and October this year RBI has moped up close to USD 25 billion. They have been moping up foreign exchange from the market and preventing the rupee’s rise. So, forget today but had it been five or six weeks back if left to itself the rupee would have appreciated and not depreciated if it had been left to market forces. So, as I see it something has to given, either the exchange rate will have to appreciate, the rupee will have to strengthen or inflation will have to increase. Any central banker cannot control both the exchange rate and the inflation rate. So, given Raghuram Rajan’s obsession to control inflation he will finally have to allow rupee to strengthen.

I am not unnecessarily deterred or spooked by today’s fall. It was apocalyptic for a lot of commodity exporters but we are in a sweet spot. So, my personal sense is will we go back to the May 23 level of 58.33 per dollar? No.

Q: Today it was an across the board selling pressure but the Bank Nifty in particular was hammered and hammered quite hard. What is going to be the pockets of vulnerability that you are going to watching out for as we see the risk off sort of trade continue?

Verma: With respect to Bank Nifty it has also been one of the biggest contributors because don’t forget that Bank Nifty alone contributes close to 30-35 percent to the broader indices. So, when markets perform Bank Nifty outperforms, when markets fall Bank Nifty underperforms; that is the rule of thumb.

I think people did get spooked at the way bond yields moved. About two to three days back we were wondering if bond yields will go all the way till 7-7.25 percent and today when bond yields went up from 7.7 percent all the way to 7.96 percent we were back wondering whether bond yields will go up to 8.5 percent. So, it was more about the way the treasury portfolios of banks will behave that spooked the Bank Nifty because a similar thing happened in 2013. The entire yield movement went up all the way from 7.6-7.8 percent levels to 9.25-9.5 percent.

So, 150-160 basis points round trip in bond yields in a single year is too much for any treasury portfolio manager in a bank to digest. So, that is what triggered the sell-off in bank stocks otherwise I have been very vocal about being a buyer in State Bank of India (SBI) even when it was trading at less than Rs 1600-1700.

Q: How much more do you see the markets declining if the global sell-off continues?

Verma: I don’t see the markets breaching the trough of 7800 which means that another 200-300 points could be taken out but the global sell-off was in any case an excuse because we have had a gravity defying 35 percent plus move in dollar terms with more than Rs 30 lakh crore being added to the market cap in less than a year.

So, something had to given, it came by way of the ruble collapsing. However, I think things will settle down and maybe this December will be different. We were poised for correction anyways, that sounds very clichéd and simplistic but I would like to believe that 8700-8800 in the next two months is there for the asking.

Q: The predicament of RBI Governor and at this point in time what will it mean in terms of RBI intervention?

Gautam: I think if we look at what we have been seeing for sometime, the intervention has been on both sides for a long time since Rajan came in. They have been following their dictate that they will not let the volatility set in. In the last two or three days we have seen sudden jerky movements which I am sure will be smoothened if RBI decides to step in either side of the rupee.

I think they have been doing quite a decent job in moping up the excess dollar, shoring up their reserves. They have gone on record that the moment US dollar starts increasing their rates going forward whenever they decide and FOMC which is going to start today and tomorrow we are going to see late in the night their judgment, what they are going to say and if that considerable period of time word is taken off then they would need all the ammunition which they have collected to defend the currency.