See rupee in 60-62 range over next 1 year: Credit Suisse

Ray Farris of Credit Suisse sees the rupee trading in a 60-62 range over the next 12 months. More specifically, he sees the rupee at 60 to the dollar from a three-month perspective, and at 62 to the dollar from a 12-month perspective.

India’s current account deficit for the quarter ended September shrank to USD 5.2 billion, or 1.2 percent of the GDP, compared to USD 21 billion (5 percent of GDP) during the same period last year.

Also read: Cautious on India's BoP, rupee: Tirthankar Patnaik

This has raised hopes that current account deficit for this fiscal could be less than even the revised USD 55 billion target of the RBI, and of the rupee strengthening.

The improvement in India’s external accounts is timely, considering the inevitability of the tapering of monetary stimulus in the US.

According to Farris, strong employment data could encourage the Fed to start the tapering process this month itself. Farris see the dollar strengthening further in the next couple of months.

Below is the edited transcript of Farris' interview to CNBC-TV18.

Q: It has been a good move that the rupee has seen, it’s at two week high after the positive Purchasing Managers’ Index (PMI) data, we saw the narrowing of the current account deficit as well but from hereon what would your estimate be on how the rupee will move?

A: We have a forecast of 60 against the dollar for a little while now on three month basis and 62 on 12-month basis. The India specific fundamentals are improving, the exception of inflation though current account data and the trade data tell us that the financing requirement that India has is coming down and the currency has been stable despite the oil companies coming back fully into the market. Hence, there is an improvement in supply-demand balance of dollars in the market. The main problem that the currency faces right now other than inflation remaining high is that market expectations for the Fed taper seems to be continuing to pull money out of emerging markets (EMs), bond markets in general.

The latest data show that India continues to see foreign selling in its bond market. I think we need to get pass taper and market needs to understand what the Fed is going to do, how the Fed is going to do so then calm down a bit and allow the positive seasonality in India’s trading current account balances in the first quarter of the year to help the currency.

Q: In India we have got a bit overwhelmed by the provincial election numbers which will come out next Sunday. So we are not paying enough attention to the non farm payroll numbers which will come on Friday. Will that be a big binary event; will that impact the market’s views on tapering and therefore impact rupee?

A: If the number comes in very strong, well above 180, a fall in the unemployment rate then the market is going to rush to price in a December taper. If the number comes in okay but not compelling with the unemployment rate unchanged 165-170-175 on payrolls, then the market have to look at consumer price index (CPI) numbers that is going to come up next given the Fed’s concerns about inflation maybe being too low. So, it has a potential for the binary event for the market to tell us that the Fed is going to taper in December but its going to have to be strong number to do that.

Q: You cannot rule out that 17-18th Federal Open Market Committee (FOMC) meeting actually trigger taper in any fashion. That is not yet out of the window?

A: If the employment numbers come in strong, then the probability of the Fed tapering in December is going to go up shortly and if after the payrolls numbers, assuming that payroll numbers are strong, the CPI seems to stabilise or even pops a bit higher then the probability of Fed taper in December will become very high.

Q: There isn’t much of foreign institutional investors (FII) investment in Indian debt, the big amount of money that came earlier this year, moved out in July-August. I think we lost close to USD 6 billion data yesterday indicated. Do you think there can be a great deal of outflow from India if indeed this fears were to resurface because in equities we have almost constantly been seeing only inflows?

A: It is important to remember that even with a smaller current account deficit (CAD) India still runs a substantial current account deficit. So, the currency will only be stable if there are net inflows. A condition of foreigners not buying anything and not buying equities in response to a shock out of the United States, namely the Fed taper, coming sooner than expected would be enough to weaken the currency.

Q: Since we do track the dollar index closely in India and that gives a rough indication of which way the rupee might head. What is your view on your three month and six month target on the dollar index? It has remained below 81 for now?

A: There are many dollar indexes so we do not particularly forecast a dollar index. Our general view is that the dollar is probably going to strengthen further led by a move higher in dollar yen up to 105 over the next several months. We think euro dollar probably participate in that to some extent coming down towards 130 and we remain bearish on Australian dollar. So, add that all up and we have got a fairly bullish dollar view driven by the Fed moving monetary policy in the states.