While markets are watching the rupee touch record lows, Paul Mackel, Head of Asia Currency Research-Global Research at HSBC, says the currency is not yet in a free fall. Edited excerpts from an interview with Parnika Sokhi:
Is there a floor in sight for the rupee?
The rupee is going through an adjustment. I think the dollar-rupee exchange rate will end the year at 57. At present, we’ve been more concerned about it being higher than 57; but I’m also very pragmatic because I have started to see evidence that the global economy was starting to do better. In that case, it (improvements) could transmit to the Indian economy — and that policy choices were also turning more constructive — then indeed the outlook for the rupee could turn for the better. But at the moment we are on the cautious side.
So was the rupee overvalued in August when it was around 44 a dollar levels?
It was somewhat overvalued and it has been going through this slow and steady weakening pressure. That process will be complete at some point. We have a view that around current levels the rupee is close to its fair value. But that is also dependent on what happens externally.
How much have the domestic factors been contributing to rupee depreciation?
There is a combination of both global and domestic factors that are affecting the rupee. Last year we were more concerned about global factors because dollar liquidity pressures were strong and flight to the dollar was very powerful. And while that still exists to a certain degree, markets have been thinking about domestic policy issues here on the fiscal side of things, and what they mean for the rupee. Markets are of the view that rupee depreciation is because of India’s high current account deficit. Sure, a high current account deficit is not helpful but there are other countries that have even bigger current account deficit and their currency is doing better than the rupee. Best example is Turkey. Its current account deficit is 8-9 per cent of GDP; but if you look at the performance of the Turkish lira in the last six months or so, it has been outperforming the Indian rupee.
The dollar has been strengthening in the risk-averse environment. Do you see the dollar index moving up further?
Generally, we are dollar bearish and that is why I have difficulty in forecasting dollar-rupee going up substantially from these levels. Towards the end of this year, the dollar may start moving down from here. We are thinking about the fiscal drag in the US — the US fiscal situation. The dollar has been a temporary place to hide; and if you believe you don’t need to hide as much, then that means the dollar will have to weaken. I don’t believe the dollar is a safe haven currency. The reason why it does quite well in the period of uncertainty is because dollar is the reserve currency of the world and offers you the best liquidity. So it is benefiting by default rather than by merit.