Despite the fact that the rupee is holding quite well against the dollar in the surrounding emerging market (EMs) weakness, the currency’s fundamentals are deteriorating, believes Claudio Piron of Bank of America.
Quoting pick up in demand for gold, corporate debt payments and end of oil companys’ FX swaps, Piron says there is slight worsening seen in rupee fundamentals. He, however, adds that the fall is unlikely to be as steep as seen last year.
Also read: Rupee to hover in 62.50-63.50/$ range now: Mohan Shenoi
Piron expects the currency to be at around 63.50 against the dollar by March and 66 by December.
Below is the edited transcript of Piron's interview with Sonia Shenoy and Anuj Singhal on CNBC-TV18.
Sonia: It has been very resilient days for the dollar-rupee. Somehow it has not collapsed as the other emerging market currencies have. What is your expectation on the rupee? Do you think it will continue to be in this range of 62.50-63 or so or are you getting a sense that there could be some domestic macro events that could throw the rupee off guard?
A: I think you are quite right. The INR has been holding quite well. I think we will start to see some deterioration. Our own forecast for the dollar-INR at the end of March is 63.50.
At the end of the calendar year we expect it to be at 66 level against the dollar. Going forward, there are a number of things in the horizon that could lead to deterioration. I guess the FX swaps with oil companies will end in February, then a number of corporate debt payments will need to be made in March. In addition to that January and February technically sees no pick up in gold.
We are also cognizant of the fact that gold inventories are being run down quite significantly, so we will see more stronger gold demand picking up. So, I think overall there is a slight deterioration, but the acute swings that we saw of last year will be behind us and that pressure will be more manageable even though the Reserve Bank of India (RBI) will still be looking to recoup its FX reserves.
Anuj: What about the other emerging market currencies and the kind of trajectory you see for them, especially in the light of what the Fed is likely to do over the next 3-4 months? What kind of correlation are we likely to see in terms of the Fed action and move in some of these emerging market currencies?
A: A crazy correlation in a sense. If you look at the worst performers amongst Asian currencies this year, it is really a very unlikely three. The worst performers are Korean won which is well known to have a very favourable and strong current account position; that’s is followed by the Philippine peso and the Malaysian ringgit.
How do we explain these anomalous and idiosyncratic moves? Clearly, the one way to explain it is the positioning in the market. Being long Korean won and being long Philippine peso was very popular in the market because everybody was focused on their balance of payments (BOP) positions and ironically countries such as India with a current account deficit (CAD) have done better.
Again it is party for positioning to be explained. Positioning in India was relatively light on the FII debt inflow so far this year. We have seen about USD 2 billion worth of inflow into the Indian debt market. If you take it from 18 December when the Fed started its taper, it is more or less around USD 3 billion. So, from that perspective, when I speak to a lot of the real money investors in Asia and outside of Asia and London and America, when they look at the absolute level of yields in India, they are attractive. Even if one puts in a bearish forecast of 66 or 67 on dollar-INR, we still get some positive total returns as a consequence of the high level of yield in India.
Coming to the RBI meeting and the more hawkishness that we are getting is what scope do we have in terms of conviction for that view if people feel that the RBI will be less forthcoming to cut rates and that may mean that the rally is slower and not as fast as was originally anticipated.
Anuj: What is your call on India vs. China equation? Last year we saw quite a bit of strength in Chinese currency and that made India\\'s exports quite attractive. Going forward what is the call now in 2014? You expect the Indian currency to weaken, but what about the Chinese currency? That will have quite a bearing in terms of India\\'s economics.
A: On that question what we would say is that we still anticipate a slow and gradual appreciation of the renminbi. Our forecast for the end of the year is 6 on dollar-China. The market consensus is around 5.97.
The reason for the cautiousness is obviously because the inflation in China remains very contained. We only get rapid pace of appreciation in renminbi if we really have a bigger inflation problem and we do not see that yet. So, from the Chinese equation that should be favourable.
We tend to be in the camp that we think that the downside growth risks to China are overplayed, but we do think that has been a leading cause of the selloff in the market. If we look at the selloff in the market at the moment, last year the selloffs were really about Fed tapering and we saw huge spikes at the Bank of America Merrill Lynch Merrill Option Volatility Expectations (MOVE) Index in treasury market.
What we have seen in the past week is that it has not been about treasury market volatility, but about equity market volatility and to that to us I would suggest is more concerned about growth rather than Fed tapering. However , if we are right and if the downside risks to China do not materialize, then that should be a pillar of support for Asia and India.
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