Re to touch 54-56/$

top: 5px; padding-right: 0px; padding-bottom: 5px; padding-left: 0px; margin-top: 0px; margin-right: 0px; margin-bottom: 0px; margin-left: 0px; font: normal normal normal 15px/20px arial; color: rgb(51, 51, 51); font-family: arial; font-size: 15px; line-height: 20px; text-align: justify; “>In the current scenario, Harding doesn’t expect the rupee to gain more that 51 per dollar.

Shubhada Rao, chief economist at Yes Bank is also negative on the rupee. According to her, the Reserve Bank will have to look at options such as spot and forward rates to support the rupee. “The chances of a self-correction in the currency are low, and would depend on foreign direct investment and capital inflows,” she said.

However, Partho Mukherjee, senior vice president of forex and treasury at Axis Bank is of the view that the rupee will break records tomorrow, but not much beyond 52.50 per dollar.

“My stance is that at some point exporters need to weigh in their receivables, at which a reversal will come in,” he said in an exclusive interview to CNBC-TV18. And when the reversal comes, it will be equally swift, he adds.

Mukherjee further goes on to say that a ‘bout of heavy intervention from the RBI might just do the trick.’

Below is an edited transcript of their interview. Also watch the accompanying video.

Q: The rupee has already lost 16% this year. Of course we have heard arguments from the central bank as well as the government officials saying don’t just look at the rupee, look across the globe and we are seeing lot of volatility as far as the currency market is concerned. But where do you see it stopping?

Harding: Nothing seems to go well for rupee at this stage. The bear run which kicked in at the end of July continues to be in play. The fundamental factors are very negative. The widening trade gap and reduced capital flows are shifting forward statements from supply driven to demand driven because of the low premium and the bearish setup of the rupee.

On the other side, the stock market is weak, there is a risk of a FII pullout, there is severe dollar liquidity squeeze and limited flow into debt and equity capital market. Combined with the RBI’s limited ability to defend the currency because of inadequate reserves or inability to sell in the spot market because of the severe rupee liquidity squeeze and inability to sell in the forward market because the low forex premium will again accelerate the demand driven mode. So, it’s the market stake holders including the RBI which seem to be stuck between the devil and the deep sea.

Q: The RBI itself has acknowledged that the RBI has limited ability to arrest the fall of the rupee at this point in time. There are also question marks on whether it really can do very much given the kind of volatility that we are seeing. Do you think the historical low of 52.54 per dollar is going to be out of the way? And what really do you anticipate to happen in the next couple of days because this is really changing every minute?

Harding: The negative fundamental factors are not going to reverse in a hurry. It’s going to take 6-12 months time, if not beyond. Structurally the market is already in a very oversold dollar position; importers remain uncovered, exporters are over covered, the ECB hedges are uncovered and people have shifted their rupee liability to dollar liability. So market is in a heavily oversold position and these companies will like to run for cover or even a rupee appreciation.

So going forward, I think the upside gains for rupee seems to be Rs 1. I don’t think rupee can gain beyond 51 or 50 given the structural issues. On the downside risk, it can extend up to 54 or 56 per dollar. So you are playing with a risk reward of 1:2 or 1:3. So given that kind of situation, I see huge demand for forward dollars to adjust to a structural imbalance even in the event of RBI intervention.

Q: What happens now to things like inflation because we are going to have to import crude at a much higher cost to oil marketing companies? What happens to consumer prices? We are already struggling with very high inflation and the governments forecast or projections are going to go right out of the window on account of this?

Rao: Quite right. The task of RBI has just got even more difficult with rupee and its trajectory and more importantly the way it looks over the next few months. Quite clearly, the advantages of stabilized price in many commodities was sharply offset by the weakening rupee and the pace at which the rupee weakened.

So, inflation management is going to be a rather sticky and more difficult task. Having said so, on balance RBI may have to look at some more options of intervening – either sport of forward. More importantly, forward because if it intervenes in spot the rupee liquidity which is already in contraction mode at about Rs 120 lakh crore would get deeper into contraction.

So, the task is quite difficult for RBI. But having seen all the macros, widening trade deficit and trickling in of the investment flows, we need to look at other flows like ECBs or NRI deposits which have seen a sharp jump over the last month. Capital flows will be important but a risk on environment in the euro zone is likely to play for a much longer duration does not really give much comfort to what we see for rupee.

Economist calls of almost around 46-47 levels of rupee are under risk. I agree with Moses that if 52.23 is breached then its an uncharted territory. Coming back sub 50 from 54 – 55 levels is going to be a task well in itself. It will be an insurmountable task for the RBI and for the macro economics overall.

Q: The word that we have got coming in from North Block here in Delhi seems to suggest that lets wait it out for a little bit. This will self correct. Do you really believe that given the kind of fundamentals that we are faced with are we betting on hope?

Rao: The talk of self correct would hinge a lot on what government is able to do on attracting capital flows through reforms, FDI and so on. Self correction given the current risk on environment globally is unlikely to just materialise out of nowhere. It needs some credible moves and measures on the policy level to have capital flows getting back into India.

FDI which is perhaps rupee denominated would still get attracted into India because that’s what we have seen in the couple of deals recently. So, rupee denominated FDI actually stands to gain. But overall self correction seems only a hope. Given the kind of situation panning out in euro zone and unlikely quick resolution to this problem, India will need to address a lot on how to be best able to attract more sustainable capital flows.

Q: Should we brace ourselves for more volatility?

Harding: Definitely the only hope for rupee is sharp reversal in Euro – Dollar from 133.5 to back to 140-145. That is a wishful thinking given the pressure on the Euro – Dollar, I think it’s a matter of time we move into 54 – 56.

Q: We have heard it could appreciate all the way to 51, but depreciate all the way down to 56. What levels are you working with?

Mukherjee: That’s a very wide choice available to us now. But I am taking the stance that at some point exporters need to weigh in their receivables. The sense we get at this moment is while importers are certainly coming into the market, we haven’t seen enough of exporters. My experience tells me that invariably in times like this it might become a situation where we will see a reversal.

Incidentally, while I wouldn’t be able to put a finger on when we will be able to see that, my view is that reversal would be equally swift. It could be a situation where a lot of exporters might rue having missed a terrific opportunity. At some point I am expecting to see exporters coming in and then probably would be the time when you will see a reversal.

I am actually saying that we will probably see a few records being broken tomorrow, but for the time being, I see the rupee probably not going much beyond 52.50 per dollar on the downside.

Q: You have spoken about what you would like to see the exporters do, but what would you like to see the Reserve Bank do? The Reserve Bank itself has acknowledged the fact that it has limited sort of flexibility at this point in time to intervene in the market. There is a question really on whether the intervention will really do very much to stem the kind of fall that we are seeing. Your thoughts on what you would like to see the Reserve Bank do?

Mukherjee: Frankly, I think the Reserve Bank does have some influence with markets and a bout of heavy intervention might do the trick.

Q: When you say a bout of heavy intervention, can you be a little more specific?

Mukherjee: I wouldn’t like to specify how much has to be pumped in, but I dare say that the Reserve Bank’s actions might act as a dampener to market enthusiasm for eating the rupee.

Q: And do you see that intervention coming in swiftly as well?

Mukherjee: Yes, I think so.

Source: moneycontrol.com

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