Global uncertainty and risk aversion may lead to RBI wanting to delay a rate cut, says Nizam Idris, head of EM FX strategy, Macquarie.
The Indian rupee has been fairly resilient when compared to many other currencies. The reason, Nizam Idris, head of EM FX strategy, Macquarie says is that there is a lot of support for the rupee on falling crude oil prices and the expected and resultant lower inflation and narrower current account deficit, which are expected to prompt the Reserve Bank to lower interest rates.
However, he adds, that global uncertainty and risk aversion may lead to RBI wanting to delay a rate cut.
He does not expect the rupee to fall much from current levels. It may ease to 60 per dollar after depreciating a bit, according to him.
Idris says the dollar index will continue to edge higher. He had forecasted the dollar index at 92-93. He adds that the dollar index may fall a bit if Fed hike is lower than expected.
Below is the verbatim transcript of Nizam Idris' interview with CNBC-TV18's Menaka Doshi and Anuj Singhal.
Anuj: What explains the strength of Indian rupee or the relative resilience of Indian rupee over the last few days?
A: Actually there are a lots of support for the Indian rupee. If you look at the fundamentals, the fall in oil prices is definitely a big positive. Basically what we see here is that current account deficit will be narrower. So external balances would benefit from the falling oil price but also it will basically mean that inflation will fall in India and it will raise the probability of the Reserve Bank of India (RBI) cutting interest rates to attract investors into Indian assets.
So in my view there is a lot of positive there although at the same time currency weakness driven largely by global uncertainty and risk aversion may actually delay interest rate cut as RBI becomes a bit more cautious.
Menaka: What is your call on where the dollar index is headed? In the last three months we have gone from 84 levels to nearing 92 on the dollar index?
A: For the last six months from 80 to 92 you are absolutely right. On a ten-year perspective, that looks weak but we are warily back to levels not seen since 2005 but if you look at it on a longer terms perspective even beyond ten years in two decades then this is still quite low. For me we have spoken about 92 towards the end of 2014, the kind of forecast we are talking about is 92-93 but we are really there. So, the dollar has actually moved faster than we anticipated.
Now, what we are looking for is that this could edge higher maybe 92.5 or even slightly higher but towards the point when the Fed hikes interest rate but as soon as the Fed hikes interest rate and sending a message to the market that the hike going forward would be slow. We are not even ruling out the probability of a 12.5 basis points move instead of the usual 25 basis points move per meeting then the dollar could weaken after the hike.
So, on the build up to normalisation of interest rates, dollar could strengthen as we are currently seeing but as soon as the hike happens and we believe that the hike will be slower than the market is pricing in or the markets fears then the dollar could weaken.
Anuj: Last year we got quite a bit of inflows in the Indian debt market, in fact far more than the equity markets. If we have a rising US rate scenario and if we cut rates in India and with the kind of general risk off that we have seen is there a risk of some massive outflows from the debt market which then puts quite a bit of pressure on the currency?
A: Exactly, there is a risk of the story persisting for some time and the rupee continues to weaken that is not our base case by the way then the RBI would definitely want to delay cutting interest rates and keeping interest rate high to be supportive for the currency and continue to attract fund inflows into the bond market that could be the case but as soon as the market starts to stabilise and this stability could happen when the Fed makes clear what it is intending to do with the interest rate then there could be room for interest rate cut.
In that event, rate cut would actually be positive for bond market as well because it actually means that the bond market will appreciate. So, it really depends on condition basically. Therefore, the answer is that when condition gets better that will be the case after a Fed rate hike. Then cutting interest rate is not necessarily a negative for the Indian rupee as such.
Menaka: So you are painting a fairly volatile picture till we see any action by the Fed. It's only thereafter that you expect a degree of stability or recovery to come back to the currency market from a rupee point of view. You said that you don't expect the rupee to weaken much further from hereon, so are you saying Rs 64 thereabouts is where you expect the rupee to sustain between now and Fed action than depending on the quality of the Fed action than depending on the quality of the Fed action or the amount of it or the size of it.
A: Yes, you are absolutely right. When we wrote our year ahead - north at the end of November actually when we published that we were talking about 64. So, the dollar has actually gone up a lot faster than we anticipated at the interim but we are maintaining a Rs 64 forecast for now on the upside. We think that dollar rupee could actually ease back to Rs 62 after the initial concerns and fears of the fact that normalisation is over. So yes Rs 64 maybe a little over shoot from above 64 given where we are right now but cannot be ruled out but then we continue to expect for the dollar rupee to come down back to Rs 62.
Menaka: We tend to focus on the dollar rupee a lot but for a lot of our exporting audience how the rupee has done vis-à-vis other currencies how they depreciated against the dollar? For instance, the Euro has become a lot more competitive over the last couple of weeks. So can you talk us through how you see that aspect of the currency play out?
A: If you look at rupee against the rest of the region for 2014 actually the rupee did pretty well. Obviously hope of reform post election was the main driver and at that point obviously the rupee was appreciating but then it weakened in the second half of the year and so for 2014 the rupee actually weakened by around two percent against the US dollar and to take that into perspective the Yen weakened, the ringgit weakened six percent and so, the rupee did really well.
In terms of competitiveness we are not really at a situation where Indian exports are a big factor just yet. Therefore India is still a lot close economy. By close economy I mean export as a percentage of their Gross Domestic Product (GDP) is still very small and therefore India does not need to compete through weaker currencies. So, the rupee has done well. Going forward, however, if you want to boost manufacturing, the ‘Make in India’ mantra then you may want to look at the currency as a potential tool. Not just yet but going forward too strong rupee may not be good for growth.Are you happy with your current monthly income? Do you know you can double it without working extra hours or asking for a raise? Rahul Shah, one of the India's leading expert on wealth building, has created a strategy which makes it possible... in just a short few years. You can know his secrets in his FREE video series airing between 12th to 17th December. You can reserve your free seat here.