Rupee weakened on Friday, closing at an 11-month low. While the recent weakness in rupee is driven by global dollar strength, domestic factors such as the high current account have also weighed on the currency. In a conversation with Ira Dugal, Mecklai Financial CEO Jamal Mecklai says it?s possible the rupee may move back towards record lows but could also see a bounce back in the medium term if global commodity prices remain in check. Excerpts:

What do you think is leading to the current bout of weakness in the rupee? Do you think rupee is headed towards record lows?

I can see the rupee remaining from weak to very weak, but then turning around. Let?s look at what is happening. Firstly, the dollar is going up. Secondly, commodities are going down. That?s both good and bad for rupee, but generally I think it?s good for India in a long term because high commodity imports are India?s big problem. Now, let?s look at reasons. If commodities are coming down, it suggests growth is not very high. The US is showing some recovery, but we may see a modest growth globally for next 5-10 years. The other way to look at it is that if we are seeing a modest growth for 5-10 years, than we won?t see much growth in exports even if rupee was to weaken sharply. So perhaps we need to think differently about what we are doing from a policy standpoint. But India will do well in a scenario where commodity prices are down. Inflation will ease, current account deficit will ease and as long as we get a few things right, money will start coming in.

At the start of the year, you talked about a range of 52-60 for the rupee. Do you think we are moving closer to the lower end of the range of 60 per dollar?

I could see that. The question is where is the dollar index going to go? The dollar index has started to move up, but if it breaks 87 mark, then it could go anywhere. If you hypothetically assume a case where the dollar index goes to 90-95 over the next year, that can certainly mean rupee could move to 60. But nothing moves in one direction. It may get pulled in the other direction towards 52/$ too, if commodities prices stay low and we see some improvement in our domestic environment and money starts coming in. But we would need a lot of foreign money for that to happen. We have already seen close to $15 billion in FII flows this year, but unfortunately that hasn?t helped.

Why is that? Is it because the trade deficit continues to be high and there is no comfort on when it will come down?

As you say, the reason the rupee hasn?t gained despite strong flows is probably because the funds are being used up to finance the trade deficit. And there isn?t a clear understanding on when the current account deficit will start to ease. On other hand, exports are not growing. So basically it?s hard to see what will move the rupee towards 52/$. The QE story has played itself out so it?s hard to make a case for much appreciation in the rupee right now.

Do you think the pullback of QE or the pace of pullback will be big variable for the dollar and hence the rupee?

I?ll tell you what I think is more important. Look at the spreads between the 2-year and the 10-year bonds in the US. This is critical because a lot of people have unhedged interests in the US in terms of loans. If the yield curve in the US steepens, you could see Libor going up fast. That I think is the big risk in the market right now. People with loans with unhedged Libor will be at risk if that happens.

Does the RBI need to intervene if we move back towards record lows on the Rupee?

I don?t think RBI needs to intervene. I think RBI has done a decent job in terms of managing the rupee but I think in terms of regulation, they have been much too slow. RBI had recently announced some deregulation, but they need to do more to deregulate.

Do you worry that short-term measures taken to attract foreign capital may have created additional risk in medium term for the economy and the currency? I am referring to concerns that the proportion of short-term debt in our external liabilities is rising.

It may have created some risk, but we are nowhere near a crisis. I don?t think we are going to see a huge fall. We hit the bottom. We have been bouncing around that bottom for the last year or so. Can we step down again? I don?t think so. There are lots of positive forces at work also but they are much quieter and much smaller. So there is a lot of potential upside in the long term. A few years ago, I had predicted that we could move to 38/$ over a 5 year period but the path to levels such as 38/$ may lie via levels like 60/$. So maybe it will go to 60/$ and then turn back again.