Rupee to be in 66-67/$ range in near term: StanChart

It is sentiment that is driving the current market and not the fundamentals, says Divya Devesh, ASIA FX strategist at Standard Chartered Bank. In an interview with CNBC-TV18, Devesh says: “the fundamental problem still has not been solved, which means that the INR could still remain under pressure in the near-term.” He says this will continue till some fiscal or monetary measures are announced by the Chinese government.  Devesh believes that “India is more insulated than the other Asian markets” and will bounce back in the long run. “66-67 per dollar looks like a reasonable range at least for this week,” says Devesh. He added that “if this equity turmoil continues, we could see a break of 67 per dollar.” With low commodity prices and reduced chances of US Federal Reserve rate hike, the year-end dollar INR forecast remains stable at 65, he says.Below is the transcript of Divya Devesh’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: As we speak, the rupee has appreciated slightly, just 66.39 per dollar versus 66.64 per dollar yesterday. How have you read into the tumultuous moves of the last 24 hours and how do you expect the rupee to move here on?A: Asian currencies do seem to be breathing a sigh of relief this morning more generally. There was some speculation overnight that the Peoples’ Bank of China (PBoC) would actually raise the USD-CNY fix to above 6.40 per dollar, which could have triggered yet another round of weakness for Asian currencies in general. But clearly, that did not happen and that has come as a signal for most market participants and there is some degree of calm that has been restored. But I do not think that the worst is behind us. I would not go so far. The risk-off move that we have seen over the past week or so, the underlying dynamic was really a reassessment of global growth and in particular China’s growth, which was something which the commodities markets had been signalling for a while, but equity markets seem to have woken up to more recently. So, the fundamental problem still has not been solved, which means that the INR could still remain under pressure in the near-term at least till the time that we get some sort of fiscal or even monetary measures being announced from China and elsewhere.Latha: So, you think the currency markets are very much factoring in a Reserve Requirement Ratio (RRR) cut or rate cut from the PBoC? What will happen if that does not come by for the next few days?A: Definitely. Over the weekend there was a very high expectation of an RRR cut from China which clearly did not happen and as a result, the markets were very disappointed on Monday. I think at this point of time, there is very little discrimination between markets. Positions are being cut across irrespective of fundamentals justifying that or not. And that is where the rupee is suffering as well. If you look at the rupee inflows year-to-date, we have seen about USD 6.5 billion of inflows into Indian equities which still substantially larger than most other Asian economies. So, that is something which is a point of vulnerability for the currency markets. If we talk about in terms of fundamental impact from the CNY devaluation, this is very little impact on India at least from the trade angle perspective, because less than five percent of Indian exports go to China. Fundamentally, India is probably much more insulated than most other Asian economies. Again, from a fundamental perspective, India also remains probably the lone bright spot in emerging markets. Which we are now getting more increasingly clear signs of recovery in the investment cycle. So, I do not think there is anything fundamentally wrong with India. It is just a case of positions being adjusted within a market which is pretty illiquid at the moment.Latha: So, how would you play the dollar-rupee? I mean what kind of range are you seeing? At what level are you are a rupee buyer or a dollar buyer?A: In the near-term, there is still probably going to be more upside pressure, 66-67 per dollar looks like a reasonable range at least for this week. Beyond that, if this equity turmoil continues, we could see a break of 67 per dollar, but at least in my personal view, I do not think 68 per dollar levels should be breached. So, 66-67 per dollar kind of handles should really be the high for USD-INR. Again, as I said before, this is really the markets really being driven by sentiments rather than fundamentals at the moment. So, once the market conditions stabilise and this volatility recedes, then we can see the USD-INR come off. So, we still stand by our end-year USD-INR forecast of 65 per dollar because clearly the fundamentals are quite positive and if anything this move in commodities, lower again is again a positive for the rupee. Also, the market volatility has probably pushed the Fed rate hike chances in September to slightly lower levels, so the markets now only pricing in 20 percent chance of a Fed rate hike in September. So, even that seems to add to a more bullish INR case for the end of the year, but at least not in the near-term.