Harinder Singh, MD, global markets co-head of wholesale banking, South Asia, Standard Chartered Bank, believes the recent fall in the rupee has more to do with global risk aversion rather than economic fundamentals in India. In a conversion with FE?s Shobhana Subramanian and Samie Modak, Singh says the rupee could remain under pressure in the short term, but would recover to 45 levels within a year.
What do you make of the steep fall in the value of the rupee?
The recent move in the rupee is the result of global risk aversion. There may have been a few contributing factors, locally, like some importers who hadn?t hedged their ECBs, but the primary driver has been the risk aversion. Opening trades, these days, are reflective of the overnight sentiment in the US and Europe. We feel that the rupee could go to 51 by December. But, interestingly, our Q12013 forecast is 45. So, in the longer term, we are bullish on the rupee. Even if there?s no default by Greece, there exists, today, a state of extreme uncertainty and, so, you could have another bout of risk aversion.
What do you feel about the RBI?s intervention in the forex market?
RBI has responded well and the intervention has been pretty well-managed. They have come in at the right moments, when there has been panic in the market.
Moreover, RBI has avoided giving any target rates about where they want to see the currency. We understand that they intervened at levels of 49.80, when it was absolutely required and, since then, stability has been restored to the market. More importantly, we have started to see two-way flows, exporters are now selling.
Several Indian companies and PSUs are looking to borrow in the overseas markets. How do you read the appetite now?
Although there will always be some appetite for top-end Indian paper, I wouldn?t advice it at this particular time because of the environment. The cost of borrowing is going up because, more than credit spreads, liquidity spreads have risen and, taken together, rates are up by over 100 basis points. Funding costs are up 75-100 bps, while credit spreads have risen by 50-75 bps.
Growth is slowing down but inflation is not coming down. In terms of the tightening cycle, what do you see happening on October 25?
Our official forecast right now, which is based on the hawkish comments during the previous policy, is a 25bps hike. And that should be the end of the tightening cycle. The only risk to that is that if global commodity prices come off, then, it gives RBI room to not hike rates. For instance, if the price of Brent falls below $100, it will add conviction to the view that there won?t be a rate hike. In an economy like India, the question is what is the cause and effect between rate hikes and controlling inflation. Much of the inflation is caused by supply bottlenecks and inadequate infrastructure. So, there is a limit to which higher rates will help lower inflation. We see the turn sometime in October and, thereafter, there should be a pause.
Where do you see the benchmark yield in that case?
Right now, the curve is absolutely flat and that?s because the entire market is positioned for a pause. Almost everyone is long bonds. If there is 25 basis points hike and, if the pause is not that obvious, you?ll see a little bit of a blip on yields as people will lighten up their positions. So, we think, eventually yields will start coming off, but it will be slower than one would expect.
Credit growth is very muted, but how would you asses the liquidity situation if the government?s borrowings go up?
Right now, we also need to consider the fact that intervention in the currency markets is also sucking out some rupee liquidity from the system. Although the amounts are small if the global risk environment calls for intervention again, the quantum of rupee liquidity going out of the system could increase. That apart, there?s the usual shortage during the festive season, but we don?t really visualise any crunch.