Re may drift lower on global cues: Sanjay Singh, BNP Paribas
Highlights
- Wherever investors are seeing quality names and seeing big chunks, they are buying it.
- Major pension funds or sovereign funds don’t go beyond Nifty 50 names.
- Next year, re will remain in the 71.5-72.5 range.
The rupee may drift lower by a couple of percentage points as a result of global cues, said Sanjay Singh, head of global markets (India), BNP Paribas. In an interview with Nishanth Vasudevan and Sanam Mirchandani, Singh said the rupee may settle around 72-72.5 against the dollar this quarter.
Edited excerpts:
The currency and stock markets seem to be disappointed with RBI’s decision to hold rates .
The markets were expecting a rate hike of at least 25 basis points. The RBI action was prudent since any rate hike was unlikely to make any impact on the current situation, which is driven by external factors such as rising crude oil prices, rising UST yields, trade war escalation and volatility in global financial markets. A rate hike might have affected a nascent economic recovery in the Indian economy. RBI’s hawkish tone and its guidance on calibrated tightening despite lowering of inflation forecast, indicates that the central bank is ready to take action, as needed. We continue to expect a rate hike of 25 basis points in December. The swap curve is already indicating 90 basis points hike in next four consecutive (policies) in a row. That’s what the market is very clearly saying the RBI should do.
Do you expect the rupee fall to continue?
The rupee may drift lower by a couple of percentage points as a result of global cues. RBI still has other measures such as OMOs, FCNR deposit schemes, which it may choose to use if situation warrants. We are expecting the rupee to settle somewhere around 72-72.5 this quarter. Next year, it will remain around the same range between 71.5 and 72.5.
The rupee’s fall seems to have accelerated outflows from foreign investors.
If you look at the overall indices in India, YTD (year to date) is roughly 3% up in rupee terms. But if you look at it in dollar terms, it is roughly around 10% negative. Overall, the dollar has depreciated around 14%. Whether domestics are holding the market or not doesn’t matter because they (FPIs) are getting returns in the dollar and there they are losing money. So, at some point, they need to cut losses or book profit, sit aside and then wait for things before reentering in a fresh environment.
RBI said it does not have a level for the rupee. Is that worrying markets?
Has India seen long-term foreign investors exit in the recent sell-off?
If you look at outflow, it is not even 1% of what they have invested. They are trimming their trading positions. That’s the reason we have seen pressure in the market. Every fund has 15-20% in trading portfolio which they are trimming. But they are not touching their core portfolio.
Wherever investors are seeing quality names and seeing big chunks, they are buying it. If you look at sovereign funds, they are taking this as an opportunity to increase their investment in the country.
People who missed the rally are entering it.
What are the risks of this crisis blowing up into a bigger issue?
The biggest problem is crude oil. If crude goes to $100, our currency will depreciate further and forex reserves will go also down. Foreign investors will see a cascading effect. It starts from crude but will have cascading effect till people start selling their core portfolio. That can be much bigger risk.
You said some FIIs, who missed out on the rally, are nibbling at some sectors. Which are the areas they are looking at specific to India?
They are majorly pension funds or sovereign funds. Their size is too big. So small and midcaps do not fit into their portfolios. They don’t go beyond Nifty 50 names to enter the market.
Edited excerpts:
The currency and stock markets seem to be disappointed with RBI’s decision to hold rates .
The markets were expecting a rate hike of at least 25 basis points. The RBI action was prudent since any rate hike was unlikely to make any impact on the current situation, which is driven by external factors such as rising crude oil prices, rising UST yields, trade war escalation and volatility in global financial markets. A rate hike might have affected a nascent economic recovery in the Indian economy. RBI’s hawkish tone and its guidance on calibrated tightening despite lowering of inflation forecast, indicates that the central bank is ready to take action, as needed. We continue to expect a rate hike of 25 basis points in December. The swap curve is already indicating 90 basis points hike in next four consecutive (policies) in a row. That’s what the market is very clearly saying the RBI should do.
Do you expect the rupee fall to continue?
The rupee may drift lower by a couple of percentage points as a result of global cues. RBI still has other measures such as OMOs, FCNR deposit schemes, which it may choose to use if situation warrants. We are expecting the rupee to settle somewhere around 72-72.5 this quarter. Next year, it will remain around the same range between 71.5 and 72.5.
The rupee’s fall seems to have accelerated outflows from foreign investors.
If you look at the overall indices in India, YTD (year to date) is roughly 3% up in rupee terms. But if you look at it in dollar terms, it is roughly around 10% negative. Overall, the dollar has depreciated around 14%. Whether domestics are holding the market or not doesn’t matter because they (FPIs) are getting returns in the dollar and there they are losing money. So, at some point, they need to cut losses or book profit, sit aside and then wait for things before reentering in a fresh environment.
RBI said it does not have a level for the rupee. Is that worrying markets?
ADVERTISEMENT
RBI does not look at any particular level for the rupee in mind. They don’t want volatility. RBI doesn’t measure this only against the dollar. They look at the entire pack of all foreign currencies. RBI is pretty much comfortable with the depreciation of the currency as per inflation. It would not mind 3.5-4% annualised depreciation. Our house view is between 72 and 72.5. The joker in the pack is crude, which is beyond anyone’s control. If crude goes to 95-100 (a barrel) the regulator will jump in to taking major steps. If you look at August 2013 and now, the kind of measures RBI has taken show it is not in panic mode. They are going step wise. If it opens the floodgates for everything at this point of time without knowing globally how things are going to shape up, it won’t be left with any ammunition.Has India seen long-term foreign investors exit in the recent sell-off?
If you look at outflow, it is not even 1% of what they have invested. They are trimming their trading positions. That’s the reason we have seen pressure in the market. Every fund has 15-20% in trading portfolio which they are trimming. But they are not touching their core portfolio.
Wherever investors are seeing quality names and seeing big chunks, they are buying it. If you look at sovereign funds, they are taking this as an opportunity to increase their investment in the country.
People who missed the rally are entering it.
ADVERTISEMENT
What are the risks of this crisis blowing up into a bigger issue?
The biggest problem is crude oil. If crude goes to $100, our currency will depreciate further and forex reserves will go also down. Foreign investors will see a cascading effect. It starts from crude but will have cascading effect till people start selling their core portfolio. That can be much bigger risk.
ADVERTISEMENT
You said some FIIs, who missed out on the rally, are nibbling at some sectors. Which are the areas they are looking at specific to India?
They are majorly pension funds or sovereign funds. Their size is too big. So small and midcaps do not fit into their portfolios. They don’t go beyond Nifty 50 names to enter the market.
Too busy to trade in stocks? Invest in Mutual Funds with ET Money!
Bookmark or read stories offline -
Download ET Markets APP
Download ET Markets APP
ADVERTISEMENT
