The Hindu Business Line : `Rupee could fall to 47.50 against dollar by year-end'

Mr Rajeev Malik of JP Morgan Chase Bank believes that the Fed is likely to hike rates further at its next meeting. He also estimates that Fed rates over the next year would be close to 6 per cent.

Discussing the rupee, Mr Malik says the current account deficit may put some pressure on the rupee. He further forecasts that the rupee should correct to Rs 47.50 per dollar by the year-end.

Excerpts from CNBC-TV18's exclusive interview with Mr Malik:

Do you think the Fed is close to the top of where it wants to raise interest rates, or do you think there is a long way to go?

I think they still have more way to go. The critical issue is that even if they do pause, how long will it be for? Our expectation, which increasingly looks like a close call now, is them being on hold in the next meeting. Clearly, there is a risk that they would hike again and then have a very short pause before raising interest rates again. What would that mean to the flows into the emerging markets?

Clearly, it would take its toll. We have already seen a re-assessment take place in the last week or 10 days and that created a fair amount of action. I think the critical issue is certainly with some specific emerging markets and I would certainly flag India in that. In the currencies, with the rupee in the lead, we expect much weakness to filter through.

With the 6 per cent target of Fed, what do you think central banks like those of India will do?

I think Fed's actions at this point are very data intensive and data focused. Every bit of data will try and spell a very different story. But the critical thing really is the core inflation, the comfort zone, which Mr Greenspan has indicated in the range of 1-2 per cent, the actual data on inflation, is about to breach that level.

I expect a rate hike at the next meeting in July definitely. Our sense is that the RBI is not done with the tightening cycle. Its basic game plan is going to remain unchanged, which is small hikes at gradual pace, so the economy can also absorb these changes. The correction we are seeing and the rupee finally depreciating slightly is exactly what perhaps the doctor ordered.

Lots of people thought that the 6.5 per cent decline that we have seen in the rupee, since the beginning of the year, was RBI induced. You said that was needed. How much further do you think it's going to correct?

We think against the dollar, the rupee is going to be Rs 47.50 by the end of this year. The framework is really the most important thing, but the markets have ignored it for the last couple of years in the Indian case because everyone was always bullish on the rupee. There is a pretty wide current account deficit on bottomline, which until now was pretty much being funded by potentially volatile flows and so these flows are reversing. So something has to give in and it has to be currency.

Is current account deficit intrinsically bad or is it sentimentally bad?

It is important to point out that current account deficit can be there for very good reasons. In a way, it is a mirror image of the strong growth that the Indian economy has been posting. But from a forex perspective, somebody has to fund it. Just because something is good, it does not mean it comes free.

Given your concerns globally, what do you expect to see in terms of inflows, and do you think India, as a market, will have to start living with much lighter flows now?

I think it would have to be the case. While India remains a pretty good story, there was a fair amount of hype that was getting built in. Do you expect to see a downturn in all the asset classes in India aside from equity and real estate?

Real estate is a bit tricky. I think tier-II, tier-III cities could be somewhat more insulated; but even on the asset market side, I will be fairly cautious.

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