CLSA sees rupee at 72/$ in FY15, blames RBI

Asia-focused brokerage CLSA on Tuesday said that it expects the rupee to resume its depreciation after a temporary respite, and weaken to 67-68 against the US dollar by the end of the current financial year (FY14), and to at least 70-72 in FY15.

“Some near-term respite for the INR given its oversold status is likely, especially if there is greater policy clarity. However, this won’t be a reversal of the trend,” CLSA said in a report.

Cautioning over the fallout of global happenings, the brokerage said: “The palpable balance of payments pressures from the shifting global liquidity tide are not temporary. Indeed, while India’s current account deficit will narrow, it is not certain that adequate and smooth financing of the deficit will necessarily play out.”

In a veiled call for urgent action from the government and the Reserve Bank, it said: “Prevention is better than cure or fire-fighting, but Indian policymakers still appear complacent about the evolving global liquidity tightening which won’t be temporary."

The report further said: “Indian policymakers appear to have given up their ineffective INR defence, at least for now. After defeating Indian policymakers in the 60-62 range, the INR has depreciated quickly in recent days to cross 65. INR has depreciated 17% against the dollar since end-April and almost 39 per cent since end-2007.”

Taking a dig at the RBI’s recent moves to defend the currency, it said: “The unnerving pace of recent depreciation was partly because of the poorly structured and communicated defence of the currency. Indeed, the announcement of restrictions on residents’ outflows sent a panic signal. This overlapped with the adverse impact of tightening global liquidity.”

Letting out the way forward, it said: “The new tactic is probably to let the currency adjust, and markets will soon begin to appreciate that the currency is undervalued. This is a sensible approach but not without risks.”

Among the medium-term headwinds, the brokerage listed India’s high inflation differential, diminishing growth differential in per-capita real GDP growth (a crude proxy of productivity), and policy and political inertia.

Continuing its slide, rupee plunged to an all-time low of 66.07 on Tuesday.