Amid the global geopolitical tensions, the Indian currency witnessed a steep fall in recent days. However, the rupee may not breach 74 per dollar levels, said Rahul Gupta, Head of Research-Currency, Emkay Global Financial Services.

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In an interview with CNBC-TV18, Gupta also said the Reserve Bank of India (RBI) may continue to maintain a 5.15 percent repo rate with an accommodative stance in its February monetary policy meet.

Edited excerpts from the interview:

What are the main factors that can impact rupee and how will it perform in the next six months?

If you see, most of last year was dogged by the tit-for-tat US-China trade war and political risk that hammered global business confidence and growth, depreciating EM currencies including Indian rupee against the dollar. This geopolitical uncertainty will continue even in 2020 as Trump wishes to wait until elections to strike a deal with China. The signing of the ‘Phase One’ trade deal will happen next week on January 15 and has been already factored in by the market. Another factor added to caution is the renewed US-Iran crisis. The Middle East conflict came as a surprise and it is difficult to assess the risks posed by it. Until there is clarity, the market will continue to react to any news.

Along with geo-political tensions, the ways to manage liquidity by major central banks will keep rupee on the edge. Domestically, there are many inflows expected on account of IPO listing or company-specific deals which can keep the upside in USD/INR capped. On the broader note, we could see the spot trading in between 70 and 73.

Will the geopolitical concerns in the Middle East escalate further, giving rise to crude oil? If yes, will that lead rupee to breach 74/$1 levels?

The move by the US “to avoid a war” has drawn a ‘shadow war’ and that the tensions in the Middle East could escalate drastically. The attacks and counter attacks are bringing the long-time foes closer to war. We need to see how will this play out because war is the last thing that the Middle East needs right now. But, we could see oil prices rallying amid caution over further attacks. If these recent attacks spark fears of a war only then we can expect Brent to rally towards $75.50/barrel, taking USD/INR spot to rise towards 73.50 zone. 73.50 looks like a tough level to break and record high of 74 seems to be unlikely at least in the next six months.

In order to adjust the rupee liquidity conditions in the market on a durable basis, the Reserve Bank of India (RBI) last year introduced the Operation Twist. Are there more twists expected, going forward?

The Open Market Operation (OMO) where the RBI buys and sells securities or what is likely called the ‘Operation Twist’ is reminiscent to Federal Reserve in order to infuse or absorb liquidity in the system and a way to pass on more of the RBI’s five rate cuts done this year to business and individual borrowers. The RBI has been buying and selling papers of different maturities, mainly to lower the long-term yield and flatten the yield curve by reducing spreads between different maturities.

So far, the RBI has conducted two OMOs and will undergo a third one. This operation may continue until the RBI is satisfied with the long-term yield. The RBI’s move of buying longer tenor bonds and selling shorter tenor bonds has led to a rally in 10-year yield. Thus, if there are more Operation Twists then we can see the 10-year yield rising further.

The bond yields are surging lately, do you see the government achieving its fiscal deficit target this financial year?

The fiscal deficit has already risen to 115 percent in the last 8 months of FY20, and there has been a persistent contraction in revenue with expenditure growing consistently. The government may approach the RBI for interim dividend. However, achieving the fiscal deficit target of 3.3 percent of GDP looks to be slightly difficult. Worries over fiscal slippage have been putting pressure on the bond prices, leading to a surge in yields.

What could be the RBI’s next move and how will that impact the rupee? Does the economy needs further repo rate cuts, what are you expecting in the February policy?

At the December meeting, the RBI flagged concerns over rising inflation, and there are fears that December CPI may rise towards 6 percent, that almost breaches RBI’s medium-term upper band target, so if this continues to hover here then the central bank may continue with a status quo even next month. However, India’s growth still remains low, the government expects FY20 GDP to hit an 11-month low of 5 percent. Also, the manufacturing activity remains gloomy so we cannot rule out further rate cuts, possibly in the next fiscal year.

In February policy, the RBI may continue to stay put at 5.15 percent with an accommodative stance. Unless there is a change in stance from accommodative to calibrated tightening, we do not expect any major movement in rupee as the market has factored in a status quo.