The rupee is currently in a sunny spot thanks to the impressive capital that Foreign Institutional Investors (FIIs) are parking into India. While the street believes Reserve Bank won't allow the currency to appreciatie beyond 59, the possibility of it depreciating to as low as 68.8 to a dollar in the event of negative election outcome cannot be ruled out, says Jayesh Mehta, Bank of America. Speaking to CNBC-TV18’s Mitali Mukherjee and Udayan Mukherjee, Mehta says the market and the currency faces a threat of negative election result that may lead to relatively weak government. Also read: Week ahead: Rupee seen capped; bonds could falter “Then, there would a flight of outflow from the equity market. I would not put it beyond radar to test the previous low of 68.81/USD if we see a big outflow coming from equity post elections,” highlights Mehta. The rupee posted a gain of 3.1 percent in the quarter ended March this year. On Friday, the rupee closed at 60.08/dollar, down 0.14 percent. Below is the edited transcript of the interview. Mitali: Tremendous rally for the rupee. What do you guys hear anecdotally about what kind of debt flows one can expect and what kind of levels traders are talking about for the currency now? A: The currency is purely following the equity momentum at this juncture and we expect that momentum to reflect the equity markets in a parallel manner. So, if one really looks at it, yes elections are around and if we get the right government, then equity market inflows could continue. There maybe some correction but then there’s the broader trend of rupee appreciating. At this juncture, it has appreciated with the inflows in last one month or so. May be Friday was a little bit of a correction which was required or which has just moved in one direction. With everything looking good both on equity and election front, the biggest risk is we get negative election results and not the right government. Then, there would a flight of outflow on the equity market which will really damage UPA in a big way. I would not put it beyond radar to test the previous low of 68.81/USD if we see a big outflow coming from equity post elections. Udayan: For the moment though what is the rupee capped at in terms of appreciation, do you think 59-60 is it for the moment or do you think it can go up in the run-up to the election result to 57-58/USD? A: Till the election results, maybe the rupee can see 59 against the USD. It purely depends on flows. We had pretty good equity flow of almost USD 3.5 billion in March and if we continue seeing some large flows from now to May 16, then that could really break 59/USD. Apart from that what has also happened is a lot of exporters who had year-end pressure to sell currencies, they are really at this juncture out of the market. Some profit booking is also happening and again people are feeling that may be RBI may not let it breach below a certain level and therefore would try to cap it at around 59/USD. As it goes towards 59 per dollar it becomes difficult to sustain at that level.
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