See rupee down at 65-66/$ next year: HSBC

In an interview to CNBC-TV18, Dominic Bunning, Associate - FX Strategy, HSBC says there are definitely risks to the higher side in terms of dollar-INR. He sees rupee around 65-66/USD levels through the next year, especially if Fed tapering takes place and there is a bit of squeeze on external liquidity.

"From our perspective, we would still see the risks towards the dollar strengthening further and that the rupee could actually come under a little bit more pressure looking at the external environment and also because may be some of the domestic conditions," adds Bunning.

The oil swap window provided by RBI is not going to last forever and there is a rising concern that there will be more residual dollar demand in the market from oil companies and that domestic factor is of key importance to the rupee, says Bunning.

The rupee has been under pressure for the last five days and is at a five week low on the back of strong dollar buying by banks.

Also read: Rupee unlikely to strengthen more: Poll

Below is the verbatim transcript of his interview on CNBC-TV18

Q: We have seen the dollar index rise to above that 80 level and that has its concomitant impact on emerging market currencies like the Indian currency. What is your view on how much more pressure the rupee might see?

A: What you are seeing in India over the last few days that the rupee is not confined. It is also what's been happening across other emerging markets and the dollar has been strengthening ever since we got may be a slight change of language out of the Fed.

Going forward what we are really looking at is the data that we see coming out of the US over the coming weeks and whether that will allow the Fed to actually begin its tapering process in December or whether that will have to wait until may be the start of next year.

So, in terms of that we have got the employment numbers coming out tomorrow out of the US, that is going to be something to watch. However, certainly from our perspective we would still see the risks towards the dollar strengthening further and that the rupee could actually come under a little bit more pressure looking at the external environment and also because may be some of the domestic conditions.

Q: How far down could it go? Could it go back to the levels that it touched a little while ago – 67-68?USD?

A: We have got a forecast over the next year or so of moving towards nearer to 66/USD area, so around 65– 66/USD through the next year. But what we have seen in the past is that when the external liquidity environment does start to get squeezed, as potentially could happen when tapering is announced, and fears etc that when you may see a bit of a squeeze on external liquidity then currencies can and do move quicker than may be the market is expecting.

I wouldn’t necessarily rule out a move up towards the kind of high 60's if the domestic environment continue to remain difficult and if policy makers in the US for example do show signs that their lose monetary policy won't be continuing further. So, there are definitely risks to the higher side in terms of dollar-INR.

Q: We spoke about one aspect which is the higher dollar index which has its impact but the more domestic fear that people have on the street is that state run banks are buying dollars on behalf of oil companies because there is fear that the RBI might go ahead and unwind the oil swap window. Is that something that you are hearing as well?

A: Certainly that appears to be the market sentiment that this oil window will not last forever and therefore there is a rising concern that there is going to be more residual dollar demand in the market place coming through from the oil companies. That domestic factor is of key importance to the rupee.

From our perspective, these kinds of measures like the oil window are very much short-term measures that government can put in place to cool market volatility and to limit some of the demand. Ultimately, if the current account deficit is going to be narrowed and for the currency to come under less pressure in the medium-term, then some of those issues need to be addressed on a more structural basis. Whether that is through the ongoing removal of subsidies for example, those are the sorts of steps that need to be taken over the medium-term. Without those sorts of measures it becomes a lot more difficult for the currency to stabilize.