A combination of factors are driving the rally in the currency market, believes Arvind Narayanan executive director and head of sales, treasury and markets with DBS Bank. The Indian currency gained strength for the fifth straight session to break below the 61-mark against the US dollar. This is the highest level hit by the rupee in the last seven months.
In an interview to CNBC-TV18’s Shereen Bhan, he said that nervousness about currency has come down and rupee is gaining strength as both current account deficit (CAD) and fiscal deficit have been tamed.
He further added that strength in the rupee will not hamper exports much. Meanwhile, the federation of Indian export organisations (FIEO) is also of the view that around 1-2 percent change in exchange rate is normal and exports won’t be hit with rupee being at current level.
Below is the verbatim transcript of Arvind Narayanan's interview with CNBC-TV18's Shereen Bhan.
Q: The rupee has rallied to a 7-month high of 60.85 to the dollar. What is driving the rally at this point in time? We have had the current account deficit (CAD) number come in below the governments expectations. We have seen the equity markets rallying to all time highs. What really is driving the rally in the currency market?
A: It is a combination of factors. Compared to what it was in August 2013 we have gone and managed our perception really well. Started with Dr Raghuram Rajan raising those FCNRs and getting US dollars into the country. After that the nervousness about the currency has come down. On top of that you have had CAD data which turned out to be much better than anticipated. In fact it is going to be much better than the 2.5 percent which was forecasted. Fiscal deficit is broadly under control. Economic recovery seems to be okay, exports seem to be fine. So, by and larger fundamentally the factors which are worrying about the Indian rupee which is the current account deficit and fiscal deficit both seem to be tamed for now and that has improved the perception.
Q: Wasn't the reduction in the current account deficit already factored in? Would you really attribute the current rally to the fall in current account deficit because I assumed that that was factored in by the markets?
A: The fall to 2.5 percent was by and large something which was positive but to a great extent factored in. Now that the number is less than 2.5 percent and the nature of the CAD, it is not just about import of gold being restricted which is contributing to the number coming down, also exports have seen a reasonable jump helped by the rupee depreciation but by and large this trend can continue if the US and the European recovery seems to be on track then exports can continue to be reasonably good.
Import of gold can may be go up a little bit but the feeling is even if the restrictions on gold imports are released CAD would not go up significantly from 2.5 percent. So, by and large there is a strong sense that the inflows which are coming in whether it is FII flows into equity or into the debt market should be able to reasonably cover the amount of deficit which we are running.
Q: What kind of range do you see the rupee trading within in the short term? Do you anticipate a much sharper rise from these levels?
A: One big event which is lined up in the near future is the Federal elections over April and May. To my mind until that event passes by us dollar-rupee is not going to break out of a significant range. So, if I think on the lower side probably about 60.20-60.30, it is not very far from where we are today. So, that would probably be the floor where the dollar-rupee would stop. On the upper side probably 62.50 or so would be the higher side where rupee would not weaken beyond that.
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