57/$ coming soon, rupee weakest Asian currency: Macquarie

The rupee, which has been the weakest Asian currency month-to-date, is headed to 57/USD soon, cautions Nizam Idris, head of EM FX Strategy, Macquarie.

Unlike many experts, he feels domestic concerns of twin deficit is more to blame for the weakness in the Indian currency than strengthening of the dollar alone.

One should now look to sell dollar/rupee pair, he suggested. The rupee closed at 56.38 to a dollar on Thursday. The dollar index has fallen to 83. The Indian currency depreciated 5 percent in May 2013.

Also read: India’s macro improving, rupee should gain: Baer’s Sama

Below is the verbatim transcript of his interview to CNBC-TV18

Q: Do you see this as an overshoot in the rupee given the way the dollar index has come down or do you see 57 coming soon on the Rupee-Dollar?

A: I see 57 coming soon. With respect to the previous speaker I do think that there are some rupee specific factors. If you look at the Asian currencies performance month-to-date rupee is by far the weakest currency in Asia.

Against the US dollar rupee is down 4.6 percent and you can get a whole range of currencies in between that. Indonesian Rupiah is down by 0.7 percent only, so the rupee has underperformed.

On top of the dollar factor that we are very familiar with right now given the likelihood of QE3 being tapered by the Fed there are also the domestic factors. For me the domestic factor here is the figuration of the market on twin deficits in India. If you look across the rest of the emerging market world then currencies with twin deficits like Brazila and South African rand have all suffered major losses as well this month. Those sorts of market views will be sustained at least for now. I think 57 is a likely target before I look to sell Dollar-Rupee again.

Q: Given the point that you made about these deficit issues would you say this is a lingering problem for the rupee? A lot of traders seemed to be approaching it as a knee-jerk reaction right now and they expect to see the rupee stabilise. Do you think that for the rest of the year the rupee is probably on a weak trajectory?

A: I think this is a combination of the strong dollar. Therefore 57 in my view is very likely, a potential overshoot of that as well. Then on the current account front if you look at the trade data in March and April, gold import has also rebounded very, very strongly.

So, in my view those factors are domestic factors on top of the international strong dollar factor. Going forward I like what I see in the Budget in the focus to reduce Current Account Deficit (CAD). I also hope that the fiscal discipline can be maintained, although as we head towards next year’s election and the food security program to be restarted there is some room for slippages there.

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