Rohit Arora, EM Asia, Interest rates strategist, Barclays expects the rupee to appreciate to 59 against the dollar in the next one month, given India’s significant policy adjustment, higher credibility of the Reserve Bank and softening of inflation.
Arora believes 59/USD is the best case scenario for the Indian currency because as the INR-USD starts moving lower, the central bank would be looking at it as an opportunity to start building FX reserves which is positive as they boost country's macro fundamental and are likely to reduce its external vulnerability
Going forward, Arora believes the currency movement will be totally dependent on election results, reform agenda by the new government and the inflows.
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Below Rohit Arora’s interview with Anuj Singhal and Ekta Batra on CNBC-TV18
Anuj: There is quite a bit of rally in both equity markets and currency markets and it has clearly been supported by a lot of foreign institutional investor (FII) flows. Is this just a pre-election rally that is getting overheated both in money markets and equity markets?
A: The rally going on in the currency market is a mix of both fundamentals as well as technicals. On fundamentals, the current account has been adjusting since Q3 of 2013 and has almost been halved since the last fiscal year and combined with that increased policy credibility, so, that makes a pretty good fundamental mix for the currency.
On the technical side, there have been on-going challenges across emerging markets and because of those challenges we are seeing increased differentiation within different emerging market countries. Due to India’s significant policy adjustment, higher credibility of the central bank, softening of inflation, INR is clearly standing out as the winner there. So, that is where we lowered our forecast on dollar-INR to 59.
There is some bit of pre-election rally as well and as you were rightly discussing just ahead on the Nifty calls which are trading at a premium in the one to three months we are seeing a similar trend in dollar-INR options as well and there could be some further leg to the pre-election rally in the coming weeks.
Ekta: If we continue to be supported on the FII front with regards to flows into equities and debt then would you possibly revise your forecast on the rupee which would be even above 59 and what could be the best case scenario for the rupee?
A: What we have put at 59 is more or less looking like a best case scenario because as it is widely expected that as currency starts to move lower, when the dollar-INR starts moving lower the central bank would be looking at it as an opportunity to start building reserves. It shouldn’t be a bad thing for the currency because FX reserves are a positive macro fundamental and should reduce country’s external vulnerability but we are looking for that kind of a range in the next one month.
Going forward, it will be totally dependent on how election results come out, what is new government’s reform agenda and how foreign inflows continue to come in. This is why we lowered only the one month forecast and taking a tactical view here, the longer term view only will be decided after the elections and new reform agenda.
Anuj: What about debt market? At times, we have seen USD 400-500 million a day come in to the debt market. Is it making the market a bit vulnerable or can it be hot money?
A: That is a fair point, like year-to-date (YTD) we have seen around USD 6 billion of inflows in the debt markets and half of that could be a positioning for the currency. However, given that the fundamentals are improving, I won’t be calling that as a hot money. However, if we look at long-term investors, there have been some inflows in the special FII category as well, likewise we are seeing inflows in the bond markets as well as corporate bonds and so, it is a mix of both.
I don’t think we are in a position just yet where we would be calling it vulnerable. Nonetheless it goes without saying that we are running into a big risk event in the next three months and if there is a huge surprise some of these flows could exaggerate the move.
Ekta: Can rupee retrace to the best levels of maybe 54-55 based on the fact that there would be possible continuous FII inflows? Do you think it would be possibly stemmed by the RBI in order to support exports and I say this because we had an export company yesterday on the channel saying that the rupee would start hurting them only if it went to levels of around 53-54?
A: That would be dependent on both. It is not only election results that will matter. It will only give currency the initial knee-jerk reaction but after that it will be dependent on how the current government’s reform agenda is, how are they implementing it and how the rating agencies are looking at it. So, that will give the sentimental push to the currency. Secondly, if growth starts to pick up which is a must thing for the sustainability of inflows into emerging markets, definitely we cannot rule that out. However, at this juncture we still think if RBI starts building up reserves seeing 53-54 this year looks like a difficult scenario.
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