The current depreciation in the rupee is part of an emerging market scare, said B Prasanna, head, global markets group of ICICI Bank.
Prasanna said the measure announced by the government are very promising and good on intent but possibly a little bit underwhelming as far as the actual action is concerned.
The government on Friday announced different measures to contain the widening current account deficit (CAD) and check the rupee fall.
"Markets were expecting a few more steps. The background to the whole story is that the rupee per se is not a problem by itself, it is only a symptom and the problem is coming from CAD, Prasanna said.
Edited Excerpts: One month forward in the non-deliverable forward market (NDF) is 72.83 per dollar giving a spot of about 72.40 per dollar. Is that the way we will start or will this cool?
I think the NDF market has opened at around 72.40-72.50 per dollar levels in Asia and it had closed at 72.10 per dollar in New York after the measures were announced on Friday night. So I would call these measures as very promising and good on intent but possibly a little bit underwhelming as far as the actual action is concerned.
Markets were expecting a few more steps. The background to the whole story is that the rupee per se is not a problem by itself, it is only a symptom and the problem is coming from the current account deficit (CAD).
If you see, the CAD is expected to go to something like $80-85 billion, which is a remarkable deterioration from around $15 billion three years ago.
So the market was expecting measures, which would have encouraged exports and discouraged non-essential imports which is why I said that the intent is positive because the government did mention it.
However, most of the action has not been announced on this front, so I would presume that action related to imports like electronic goods or gems and jewellery could possibly be announced in the weeks ahead or in the days ahead.
What was announced was the overall steps which were relating to capital flows. So from that perspective, we are possibly doing some of these when the short-term view on emerging markets anyway is a little dicey, so I guess these things will come and become very positive when things also turnaround.
Maybe the inflow number which economic affairs secretary SC Garg had expected around $8-10 billion, we may still achieve that number but that will be over a medium-term or sometime later. We need to look at, watch out for steps which the government announces as far as the CAD is concerned.
It is a two-part question, you said $8-10 billion could be the medium-term flows. In the very immediate term, what kind of flows do you see from these measures itself and what else would you expect from the government over the next two-three weeks?
In terms of an actual estimate of inflows, it is a difficult call to take. We are living by the day and you know that we are all hostile to both oil prices as well as the dollar. There are two parts to the rupee depreciation over the last two months.
The first part, when it depreciated till around 69-69.50 per dollar, was the period when the dollar was appreciating and the depreciation post 69.50 per dollar to 72-72.50 or about those levels, when it was not appreciating but emerging market currencies were depreciating.
From that perspective, definitely, we are a part of an emerging market scare or fall. But at the same time, we do have our own issues such as the CAD. It is good that they have identified CAD as a problem and if the market gets to know that the government is on the job and is going to come out with measures, definitely the view going forward will get better.
What kind of a range, therefore, would you look for in the rupee?
Today and over the weekend, the dollar has appreciated. There is going to be trade talks just 10-15 days later but US President Donald Trump has gone ahead and said that he is going to impose tariffs on $200 billion worth of imports.
China has also said if they the US impose tariffs then they will withdraw from the trade talks. We are completely hostile to what kind of development happens on this.
However, based on whatever measures which have been announced by the government, I would still say since the action was a little underwhelming, maybe 72-72.60-72.65 per dollar kind of range for the day, we are really surprised if it opens at 72.80 per dollar, I would be more thinking in the region of 72.40 per dollar.
So the range for three months is more could be in the region of 72.50-73 per dollar depending upon how EM currencies stabilise and the follow-up measures by the government.
Also wanted to know your views on the bond market, there is an Open market operations (OMO) announcement but US yields are at 3 percent and there is this fear that rupee could fall a little further, we remain around 8.2, how do you look at the bonds?
The OMO announcement was kind of surprise at least for me. I didn’t expect it because it seems that the Reserve Bank of India (RBI) would probably want to keep liquidity tight rather than try to achieve neutral liquidity.
All the assumptions that people had about how much open market operation they had to do or all of the assumptions about what kind of durable liquidity needs to be infused in a year when there is a lot of withdrawal of liquidity, from that perspective, I was a little surprised but having said that, the range would be in the region of 8-8.25 or 8.30 depending upon how oil and dollar moves.
We have already touched 8.20-8.22. If oil were to cross $80-81 per barrel and dollar were to go to 96.50-97, definitely higher rates are warranted and also that the interest rate swap market was already coming from an expectations of a 50 basis points rate hike plus a 25 bps rate hike going forward, so total of 75 bps was in the price.
Some of it might get unwound today because we didn’t have interest rate action on Friday but if the dollar and oil were to move higher, the pricing can slowly claw its way back.
What is your sense of the yield market? Today even Reliance is 15 percent cheaper or at least 10 percent cheaper if you looked at the rupee and the markets also have come off, the equity markets, at some point Tata Consultancy Services (TCS) is 15 percent cheaper for a foreign buyer, what is your sense? With an 8.2 yield and Indian equities also effectively cheaper for a foreign buyer, when do you think the tide can turn? You think a combo of 8.2 or 8.3 plus 72-73 plus can turn the tide and make us look attractive?
Before answering that question, I wanted to make one point on the foreign currency convertible bond (FCCB) window that you were discussing. I feel that it is a measure which should possibly be the last on the line. When the last time we did it, we had problems of forex reserves in terms of import cover and all that.
This time around, both in terms of import cover and in terms of CAD cover, we are much better positioned and what FCCB does is to actually get the bank money masquerades NRI money and come back into the system when we already have $400 billion reserves.
I am actually expecting RBI to maybe be a little bit more aggressive in using the reserves to defend the dollar/rupee this week and also I do expect some kind of import restrictions to come on items like electronic items. Those are things which are positive to look for. I have a feeling that the entire bazooka has not been released on Friday. It is very possible that they would come out with more steps this week.
To answer the question on equities and on rates, the situation is a little funny right now because we are seeing a deteriorating macro situation but a better micro. You are seeing earnings estimates coming up, revised higher and you are seeing that companies are coming out with better results.
If you look at the market price, it is a combination of earnings growth and discounting, and discounting is a function of interest rates also. So when interest rates are rising, you will definitely have a downward bias in terms of the P/E ratios but the earnings itself is showing an improvement.
The question is whether these earnings improvement is already factored in by the market or not, it is very difficult to say that. So as long as we continue to be in the EM kind of a crisis or this kind of a theme which is playing out in the emerging markets which is that we get hit by reducing dollar liquidity and rising US rate.It will be very dicey to take a call or a positive view. So I think even in equity markets, we need to see the coming back of a stable government. So I guess it will take some time for the markets to do well over a longer period.