Re broad range at 49-51/$: StanChart Bk

Q: If you were to be hopeful about some kind of recovery in the Indian Rupee – what would you predicate it on, a break in the dollar strength globally or any kind of liquidity improvement out here- which do you think could be the more compelling reason to hope that rupee gets this side of 50 and stays there?

A: It will have to be break of the dollar strength. At this point in time would you say its risk aversion to emerging market class? And if that comes back, I think that will be the big reason why the dollar-rupee should breach 50. We think that would happen and its only a matter of time though one cannot put a timeframe to it but as and when it happens the dollar-rupee should come down to the level of around 48.

The way to see this is that when the markets rallied, emerging markets being high beta asset category rallied  more than the rest of the world, now that the down move started the same logic holds good, which is why the reaction in asset markets in the emerging market countries are amplified.

Q: There has been a lot of talk or expectation that there will be large-scale monetary policy action- what is the rupee pricing in on all those key rates- what are they expecting to see on the reverse repo, repo and on the CRR?

A: We are expecting rate cuts and to give credit where it is due the Reserve Bank of India (RBI) has done a fantastic job in managing liquidity which is something they could do very well.

Dollar liquidity is a slightly different proposition. We would expect them to manage that on a dynamic basis, this would mean CRR cut and in fact I would not be surprised if I see a rate cut over the next two days given that they are particularly active in the forex markets and have been intervening. They intervened around USD 1.5 billion yesterday, so I would expect a CRR cut.

We are expecting 150-basis point till the end of December and to top it up a repo rate cut of 50-basis point too. But the drop in oil and inflation gives the RBI and the Government a lot of ammunition to get active both on the monetary and fiscal side.

Q: Do you think just as the market overshot in its expectation of the rupee strength it might be overdoing the rupee’s weakness as well or this is the fair level that you would expect the rupee to trade at?

A: I think we have overextended. We over extended for the reason that other than the overseas sentiment and a reduced earnings growth from an India Inc perspective there has not been a material change. I would say that because the big negative only a few months ago was on account of oil and BoP (balance of payment), now the oil has come down, the Dubai oil is quoting at USD 45 per barrel and for every drop in the price of oil you save USD 800 million, so you have saved USD 80 billion of your oil import bill, so there are quite a few positives. Unfortunately at this point in time the positives are conveniently getting parked outside while the markets are focusing negative.

My personal view is that we have over extended and when the risk aversion is lesser; India would be competitively advantaged compared to some other countries. 

Q:  Given the movement of the rupee recently, how do you see it will show up in the results or balance sheets of India Inc, both exporters and importers given the kind of hedges some of them had and how the rupee has moved- what would you expect to see in terms of the foreign exchange impact on the earnings going forward?

A: I don’t have the exact sense, I would only have a sense from the high level perspective as to what India Inc would be positioned at. When rupee was at Rs 40 to a dollar lot of people where talking and were positioned for levels of Rs 38 to a dollar, which is what we are seeing now. Now, that it has straddled 50 people are becoming increasingly pessimistic, what this means is that very often they monetize their view; at Rs 40 to a dollar most were short dollar and so exporters would have hedged, importers would not have covered. What that does is it amplifies move on the other side if the markets turn viciously which is what we have seen but we have seen lot of importers cover their near end