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Don’t fret over Re fall: Ananth Narayan of StanChart Bank

Strength in dollar has been weighing on Asian currencies with the rupee falling to a 10-month low.  Ananth Narayan, Head of Financial Markets at Standard Chartered Bank explains why the “gentle depreciation” was expected and why it should not be a cause for concern.

Below is the transcript of Ananth Narayan’s interview with CNBC-TV18’s Sumaira Abidi and Reema Tendulkar.

Sumaira: Could you tell us what you make of this weakness in the rupee. Is this temporary, is there more downside and at what level are you expecting some meaningful intervention from the Reserve Bank?

A: This is kind of an expected correction in the rupee. The reality is since June-July of this year we have seen a significant amount of dollar strength going through across currencies. A few currencies have bucked the trend including the Indonesian Rupiah and the Indian Rupee for a variety of reasons. At some stage the REER (Real Effective Exchange Rate) has to catch up, at some stage the interest rate differentials and the growth differentials have to catch up. So to that extent the kind of gentle depreciation we are seeing in the rupee is in a way a welcome step. It is not really a problem for any of us and the market participants. So this trend will continue, you will probably see gentle depreciation continuing, you will see the Reserve Bank of India (RBI) mopping up dollars when there are inflows preventing a significant depreciation of rupee. A Rs 2-3 depreciation over a year is not really anybody’s problem. It is warranted by REER and by interest rate differentials.

Reema: What would be the key levels that you would watch out for now?

A: The level of Rs 62.35/dollar was kind of significant resistance which seems to have been breached right now. We could see a move up to Rs 63/dollar. As long as the pace is not frenetic and as long as we don’t see panic in the system — we definitely aren’t seeing panic at the moment,— it is fine. You could see Rs 63/dollar level being tested. At Rs 62/dollar on the downside you could probably have Indian banks and the RBI mopping up dollars. You could see a move up to Rs 64/dollar in the middle of next year. Again gentle depreciation catching up with the other currencies across the globe making sure the REER doesn’t go completely overvalued on the rupee and there is good news all around.

Sumaira: Flows could be weak towards the end of the year. How much low do you think the rupee could head to by the end of December?

A: You could see weakness in the flows and the reality is there is always a fear that the response from the central bank can be asymmetric i.e. a lot more fervent when it comes to mopping up dollars and a lot of reticence when it comes to supplying dollars when there is a shortfall of dollars. Having said that I don’t really expect a rapid depreciation as such; the reality is the RBI’s coffers are reasonably full right now. They will be watching markets to ensure there isn’t too much of volatility. The risk is of course is, which the RBI keeps pointing out, that markets are becoming too complacent. The view I am giving you is probably generic across the market. There is a significant amount of long rupee positions built both internationally as well as domestically. That doesn’t augur well in terms of vulnerability of the rupee. As a base case that shouldn’t be a cause for concern. After all the RBI’s coffers are full. Having said that there is a tinge of nervousness in the background that maybe there is just too much of complacency around and not enough of preparedness for the shock.

Reema: You said gentle depreciation is okay given the REER. What according to you is the fair value of the rupee based on the REER?

A: The data that we have as of October and unfortunately there are lots of moving part since then; Consumer Price Index (CPI) has come down, dollar has strengthened against other currencies but at least the data of October suggested a close to 10 percent overvaluation of the rupee. I must hasten to add though that these are not really good numbers to determine current value of the rupee. These indicate trends; these indicate general direction rather than absolute values.

So as I said the forward still indicate more than Rs 4 depreciation over the year, around Rs 4.2 or so. I don’t think we will depreciate to that extent over a year’s perspective. Rs 2-3 seems more likely. That kind of depreciation should be fine for everybody.

Reema: What is the in-house call on the dollar, is it in a multi-year up trend? Where do you forecast for the dollar?

A: The in-house view remains that we are seeing asymmetric markets right now. The strength in the US continues, the weakness in Europe, Japan and China kind of continues as well. So, you are seeing this asymmetry which will translate therefore into asymmetric monetary responses and the possibility of the dollar strength continuing. So, we are seeing the strength in the dollar continuing. There are lots of moving parts too, for instance the sharp move in energy prices and the impact it has on shale production in the US. All of that could see things changing. If the current trends continue, globally we will continue to see muted inflation, disinflationary kind of growth which will not be good news for the globe as a whole and including for India. So, the trend in dollar strength ought to continue which again probably buttresses the case for gentle depreciation of the rupee.

Sumaira: What is your expectation from the CPI numbers?

A: We are expecting a 4.4 percent print today. I think then subsequently it moves up to 5 percent and then maybe in January to March it is closer to 6-6.5 percent. The average for 2015 we think would be around the 6 percent mark. So, as long as oil continues where it is, even allowing for a bit of bounce back in the oil we should be seeing the average 6 percent mark for the next year.


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