Rupee likely to be in 65-63/$ range in coming months: Devesh Divya, Standard Chartered Bank

In a chat with ET Now, Devesh Divya, Standard Chartered Bank, said that rupee is not overvalued as is being said and that the emerging market assets will continue to do well in the coming time under a weaker dollar environment.

Edited Excerpts:

ET Now: If you could just tell us your view on the dollar index first and do you think the trend would continue?


Devesh Divya: We are actually quite negative on the dollar so we are still looking for more weakness in the broader dollar index. The US Fed is very close to the end of its hiking cycle so we will wait for one more rate hike in December and may be couple of more early next year but that is about it - that is the end of the Fed hiking cycle.

But at the same time the ECB, Central Bank in the Eurozone are tightening monetary policy so we expect hint of tapering at probably today’s meeting and then some more details may come later in October followed by rate hikes in the Eurozone next year. We think that Euro is going to strengthen significantly even from current levels; we are targeting 127 on Euro dollar sometime next year. This means that emerging markets assets - both equities and currencies - will continue to perform quite well in this broadly weaker dollar environment.

ET Now: What you are pencilling in for the short term as far as the rupee goes?

Devesh Divya: For the rupee the factors are a little bit more balanced. So even though we have a very positive view on EM currencies more broadly gains, rupee might actually be relatively modest even in the overall context of a weaker dollar. So the range that we are really looking at over the next three to six months for dollar rupee is a 63 to 65 kind of range.

On the debt side we think flows into the debt markets from foreigners is going to slow as debt utilisation has hit very high limits. On the equity side though there is still some potential for more inflows coming. At the same time trade deficit is probably going to increase over the coming months. We think that we have already seen the best of very low trade deficit and very low current account deficit that is probably behind us so going forward probably going to see higher trade deficit which is not really that good news. But again sort of an offset to that we have foreign direct inflows which are continuing at a very solid play.

So overall the positive and negative factors are probably very finely balanced to add to that mix the Reserve Bank of India has been very keen in building fx reserves. The Fx reserves have been on a very very strong growth momentum and they are clearly worried about rupee getting too strong as well. That is going to continue as well and that will continue to put a floor under dollar rupee so 63 to 65 is the range that we are looking at for dollar rupee over the coming months.

ET Now: What your outlook is for the currency and the overall export competitiveness angle?

Devesh Divya: This is a very important part of the INR story. Everyone keeps talking about rupee getting too strong and definitely if you look at some of the metrics which the RBI focuses on, for example the 36-country real effective exchange rate which is rupee on a trade weighted basis we saw very strong gains in the first quarter of this calendar year but since then on a trade weighted basis rupee has actually declined or has actually weakened. So in fact on a year to date basis now we are almost flat on that index which the RBI tracks. It is close 117 now. So I would not really say that the rupee is too overvalued or it is hurting exporters but at the same time the approach with the RBI seems to be taking as to keep the rupee stable on a trade weighted basis so they would be very inclined to see rupee gains from these levels even though the rupee may not be overvalued currently.