The Indian rupee fell to record lows in trade on Monday due to continued pressure from a stronger US dollar and weak economic fundamentals. Ashish Parthasarthy,treasurer at HDFC Bank,tells Ira Dugal that while a combination of factors have driven the currency to record lows,the rupee may not sustain at levels below 57/$.
What has led to this sudden depreciation in the rupee? Is this largely in reaction to the dollar or have domestic vulnerabilities played a part?
I don’t think domestic vulnerabilities is the word. But yes,firstly,the current account deficit remains high,specially based on the gold demand in April and May. Along with that,globally,dollar became stronger and similar kind of currencies,where the countries have large current account deficits,have also depreciated by a similar amount of 5-9%. We have also seen some liquidiation by debt FIIs this month. If you put all these together,that has probably led to fall in the rupee.
In terms of levels we have moved back to record lows but it looks like the depreciation this time is more orderly? Would you agree?
While the current account deficit continues to be an issue,this time the move has been more in line with global sentiment also. So,the equilibrium point for the same kind of current account deficit would be much higher. Yes,it would be in order to say the market doesn’t have any kind of panic that we saw last year. That could also be because a reasonable amount of exposure may be hedged on the import side which may not have been the case when the rupee first depreciated sharply. A lot of people that time may have been caught unawares. Now,I think since the rupee was not that strong at the short end,a lot of covering keeps happening. It’s very difficult to say if its been orderly or disorderly but if you look at whether people would have been caught on the wrong side,I think it would be a much smaller number or percentage.
From here on,what are you expecting in terms of further downside?
I think we are in a volatile period globally. A month back,across currency markets,there was a reasonable consensus that the dollar would be strong,the yen would be weak and the rupee would not go beyond a certain point becasue portfolio flows will take care of the CAD. I think the last four weeks,some of those consensus views have changed. We don’t know whether the US economy will remain strong,whether QE will be pulled back or not. In Japan,the yen may not move in one direction and the collateral impact of Japan’s policies is still being weighed. So now,it seems like most currencies are seeing two way movement. Because of that I think when risk aversion is higher,the rupee will see pressure. Our view is that this is temporary. We could see a much lower dollar-rupee level by end of June which means the rupee may strengthen. I think we are close to the top for the dollar versus the rupee which means the rupee may not slide much further.