See strong rupee on macros, govt steps: Federal Bank

Anuj: What explains the resilience first and then the strength that we have seen in today\\'s trade in currency and do you think it is sustainable? Can we go past may be even Rs 62?

A: Even in the sell-off which we saw couple of days back rupee was holding fort. I think the inherent strength of the rupee is in the macro economic fundamentals of India. I think capital chases the growth and now with all the steps taken whether it is on the ordinance front or on the coal side plus the sale of spectrum, all these things would bring in a lot of cash to the government kitty, particularly spectrum thing.

Oil had come as a boon because nobody had expected it in September that oil would go to these levels. At best people were betting at USD 90 or so. Now that it has come to as close as USD 50, India definitely is going to benefit from it. Almost one third of our import bill used to be from oil. So, that brings strength to rupee. On CAD front we are well in control. I would not be surprised if we end up with CAD of less than 1 percent of GDP.

On fiscal deficit side, there are challenges because the revenue side has not grown to that extent but with this spectrum sale and may be towards end of this quarter if a good chunk of disinvestment happens I think 4.1 percent is realisable.

Additionally, lot of movements has happened on the defence front. It is not being reported that much but nearly Rs 1-1.5 lakh crore worth of proposals have been cleared. So, that definitely would bring in more of foreign capital chasing Indian assets, rupee assets. So, that is what is seen - on the sovereign side we do not have any scope unless RBI decides to hike the limit of investment into sovereign debt side.

On the corporate side also I see a minor arbitrage still existing because if somebody raises overseas and invests in 1-2 years corporate bonds or so there is some positive gain on a fully hedged basis because the forward premia is hovering around 6.6 to 6.7 percent or so. At the same time I would not be surprised if central bank intervenes and once again starts mopping up the extra green bags that were floating around. After all this FII money is hot money. So, they definitely would be happy with adding to their already burgeoning kitty, forex kitty nearly USD 320 billion is there but when you compare it with 2010 levels, four years back we had this level. So, overall I think there would be inherent strength in Indian rupee but I do not think RBI would let it appreciate beyond a point. I would rather see a one percent depreciation every quarter of that order or so. So, around Rs 0.60 to Rs 1 would be the depreciation every quarter on a medium term basis.

Anuj: In that case if you have a major risk off globally like we saw about two or three days back, yes the currency showed signs of resilience but if we have a sustained risk-off in global markets and if we have a dollar index moving towards 100. In that case what is the downside risk to the currency?

A: The kitty is quite strong and if our other fundamentals are okay I do not see any reason why there should be a capital flight. On interest rates moving up in the US there also I do not see any hurry. So, if it starts even in second half of this calendar year that is well discounted and market players would take it in their stride. So, I won't see much of a turbulence happening as far as dollar rupee pair is concerned. However if we see the basket and all there is a risk of rupee appreciating against Euro and that may hurt exporters. So, that is one area which one will have to look at, may be invoicing currency may change because we have a considerable export happening which is Euro denominated.

Menaka: I think one of those things, we tend to focus a lot more on the rupee-dollar denomination than how the rupee is doing against other competing currencies so to speak and there the strength in the rupee is not necessarily positive. What is the tolerance in the economy for the depreciation in the rupee? Ideally where do you think the rupee is fairly valued if we were to take all other issues into account including export competitiveness?

A: Till March anything between 63 and 64 would be an ideal number. Thereafter, as I said 1-1.5 percent depreciation every quarter is welcome. If it doesn’t happen you may see on both sides to arrest volatility if it happens you would find central bank being there.

So, if it appreciates there would be mopping up, if it suddenly falls you may see supply of dollars being added because now the war chest is quite strong.

Menaka: What level of rupee would you link to the potential of an RBI rate cut if at all?

A: Our interest rate decision may not immediately be impacted by dollar rupee exchange rate. It is impossible trinity and therefore you cannot focus on all three simultaneously. What I would see central bank doing is more on the interest rate side and at the same time see the capital flows.

So, what type of capital flows are coming and all that. So, you may have more of free capital flows being permitted, may be some relaxation as we go forward may happen as far as the capital accounts side is concerned. So, as we go forward and we see our growth picking up I am quite sure that capital would flow to those frontier where you have a potential growth happening in next 3-5 years.

So in that scenario I see a potential where 20-25 percent depreciation may still happen in Indian equities in dollar terms. So, that be the case I would see RBI more on the side where in they would be sterilising the extra supply of greenback rather than injecting into the system.

As far as the number is concerned, I think anything between 63 and 65 for next 6 months is okay.