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Bhanu Baweja of UBS believes that the rupee is not far from touching 38-38.50 per dollar levels. He says the rupee will continue to be used as a tool to contain inflation.
The significant currency rise seen in emerging markets is due to strong growth. UBS advises clients to be long on the rupee in mid-term.
Fed rate cut is unlikely, he says, as data is yet not very weak.
Excerpts from CNBC-TV18's exclusive interview with Bhanu Baweja:
What have you made of this recent run in the rupee and do you think there is more left there?
Yes, I certainly do. It is not just the rupee that is appreciating; I think it is a pattern you will find all across the most emerging markets and is driven by stronger growth.
As I said we have seen the beginning of unwinding of the global imbalances; I think we are living in a very interesting time. You may have heard Bernanke a few years back described the global imbalances caused by global savings clot, I think that is an incorrect description. The global saving imbalances have been caused by an investment drought more than a savings clot.
As domestic demand in economies such as India rebounces, you will find that slowly the global balances are unwinding and that the process will be accompanied by the appreciation in these currencies.
India is one of the leaders of this global imbalance unwind; this is happening not just in India but other emerging market economies in Indonesia, Malaysia, Brazil, Columbia, Poland. So, there are quite a few economies where the growth is very strong and we are seeing significant appreciation of their currencies and their governments do not mind.
In India RBI doesn't mind because obviously it helps to fight inflation and the growth is still extremely strong. So, I think it can continue for a while and it must,
How does that translate into where the Indian currency might move and what targets have you set for it against the dollar?
In the next 6-12 months we are looking to be under the 30's handle which means that 38.5 or 38 is not far away.
What is happening in India is also special, as India has moved on its currency after realising that they were slightly behind the curve on inflation, and the inflation matters much more politically than does the dollar-the INR in India. So, if politically things are not going all well because the inflation is going higher.
The ministry of finance would obviously have given clear instruction to the RBI, which still is most independent of all the Central Banks, to do whatever it has to do to get inflation under control and that is when we saw the Dollar-the
So, the call really is on whether or not we expect inflation to stay high or inflationary pressures to stay elevated; my opinion is yes, we do.
As a result of I think rupee will continue to be used as a tool to try and keep inflation under control and I do see the rupee going higher.
I have been advising my clients to be long on the rupee in the medium-term and also to be long volatility in the dollar-the INR.
Because I expect as the government focuses on inflation, they will be able to focus less on the effects and volatility is likely to rise.
What is the call on dollar now? There are some people who believe that it has been oversold and in the near-term at least you should not rule out a strong bounce back in the dollar, do you share that view?
I have some sympathy for that view, but that is the near-term. In the longer-term it is fair to say that the dollar still should continue to remain under pressure. It has a huge deficit of which I have no problem with; my problem is that it has a deficit.
It is a politically economy argument that finances that deficit and can't go on forever. In fact if we move to a more protectionist world the dollar is going to come under severe pressure, but as you said in the near-term there are a few indicators to suggest that you could see the dollar come stronger.
Amongst them are possibly lesser reserve accumulations by major global Central Banks in China and Russia compared to what they did in Q1, which were extremely excessive.
Secondly, some of the forward looking data in the US is looking decent, employment is still looking okay, but that is backward looking.
If you look at the ISM factory orders, these are suggesting that the US economy may not be losing quite as much steam as quite a few people have anticipated. They may not get the Fed rate cuts that everyone is looking for. That could lead to a bit of a dollar rebound in the near-term.
If one sees what has happened in the emerging markets during the last one-week, the dollar has gone stronger against the Euro, against the yen. But the dollar has not gone stronger against the rupee, not against Poland, Brazil and so there is a pattern out here. I think the emerging market is doing well and as a result these currencies are doing well.
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