Bond auctions begin in the first week of April and Ananth Narayan, co-head of Wholesale Bank, South Asia, Standard Chartered Bank believes yields are likely to remain in the range of 7.85 to 8 percent. He also expects the RBI to continue open market operations (OMOs) in April.
Narayan further added, "As a base case, given the drop in core inflation, given the actual slowdown not just in investments but also in consumption now, I think there is a case to be made for softer monetary policy going forward. I think liquidity will be okay. To that extent, I expect 7.85 percent to continue in the short run."
Besides that, Narayan is hopeful of seeing the same level of open market operations (OMOs) next year as was noticed in FY13. He also told CNBC-TV18 that the removal of FII debt investment limit is a positive for the yield curve.
Going forward, Narayan feels bond markets will continue to expect around 25 to 50 basis point cuts from the central bank. Meanwhile, Indian exports are likely to improve in the current fiscal, he noted, boosted by the US private sector.
Narayan also believes the Indian rupee is likely to hover around the 53 to 56 per dollar range.
Here is the edited transcript of the interview on CNBC-TV18.
Q: Is everyone talking about eight percent on the yield now? Is that a given?
A: We almost reached there and we weren’t really far away from eight percent. We remain in the range of 7.85 to 8 percent or so. The auction calendar for April in the new fiscal doesn’t look very daunting. It is just three auctions. The next year as well we should see open market operations (OMO) continuing.
On that basis, it shouldn’t be difficult for the auction program to go through. Having said that, clearly as April progresses, people will start concentrating on what the expectations from RBI are. The last policy didn’t indicate that RBI was looking at too many cuts going forward. That would be a big question mark.
Having said that, as a base case given the drop in core inflation, given the actual slowdown not just in investments but also in consumption now, I think there is a case to be made for softer monetary policy going forward. I think liquidity will be okay. To that extent, I expect 7.85 percent to continue in the short run.
Q: How generous do you think the RBI’s OMO program will be given the point you made about the auction calendar not being too daunting?
A: The reality is we do need decent sized OMOs like we saw in this fiscal to continue in the next fiscal as well for the bond markets to behave themselves. This year we saw about Rs 1.25 lakh crore of OMOs. The next year, our estimation is that the total OMOs would be of a similar size, essentially because of reasons like currency leakage which will be roughly the same as this year.
Secondly, you also have the RBI earning a lot of coupon interest from the Government of India, given its large holding of government bonds. Merely to neutralise that, we should see the RBI going ahead with more OMOs like the last fiscal. Hence, taking the base case, we expect the auction calendar to be manageable, OMOs to continue and therefore bond markets to behave themselves.
Q: How much of an impact do you see from those announcements on Saturday about removing restrictions on FII debt investment limits?
A: I think it is very positive for the country as a whole. Clearly, it makes life a lot simpler for investors across the board, across government’s security as well as corporate bonds. We are awaiting the actual notification from SEBI and RBI. If it does come out the way the government has spelt it out, I think it is very positive.
In terms of the actual yield curve, given the utilisation of the sovereign limit has been pretty high, we don’t expect an immediate move in government bond yields as such. However, we might see a steepening of the yield curve and people might move towards the shorter end of the curve where there is more comfort given that flexibility will now probably exist.
It will however be extremely positive for the corporate bond market where the utilisation has been on the lower side largely because of infrastructure and rollover restrictions. If they go away, we should see a big fillip to the corporate bond market.
Q: What did the money market come away from the Reserve Bank policy thinking? Some people are pointing out that there is actually the option of the Reserve Bank not moving any more through the course of this calendar year. What’s being priced in right now for the money market from the RBI?
A: At the moment, I think the bond markets continue to price in 25-50 basis points more of cuts. Broadly, if one was to look at the yield curve, you would say the market is expecting about seven percent repo rate by the end of this calendar year. Those hopes could be belied and a lot will depend on data as it emerges in the new fiscal.
But as a base case, it does look like the slowdown is for real. While we should see some better fiscal spending coming out once the government opens its coffers on April 1, the anecdotal data whether it is automobile, whether it is FMCG, it still indicates softness. Therefore given that, given softer core inflation, given an improvement in the current account deficit which I personally expect, maybe the RBI will have room to rethink and actually go ahead with a few more rate cuts.
Q: The rupee has been pinging around quite a bit. What kind of immediate levels are people talking about and which way is this one pointing? Do you expect to see more of a pull back, do you anticipate strength or more weakness in the currency?
A: I think it remains in a 53.56 range for now. In fact, I have become a bit of a stuck record saying the same range for a while now. I am not as bearish as a lot of observers are right now. I think the market is reasonably prepared for rupee weakness.
If you look at the one year out right forward premia at Rs 3.6, it is close to all time highs. I think a lot of importers have been hedging and a lot of people who have taken dollar debt have been hedging their dollar debts. Exporters have not been selling enough. The whole thing about the current account deficit has become a topic of enormous amount of discussion and everybody seems to be a little more pessimistic than is required.
Personally, I think exports will do a lot better this year, especially given the growth in the US private sector which should ring well for our exporters. I also expect gold demand and oil demand to moderate a little bit. It also appears that energy prices will remain capped for now, which can be a huge medium term positive for India.
All told, if we can just get that movement on the CCI and some of these stuck investments going through, I think we could see a surprise on the positive for the rupee which people really aren’t expecting right now. So for now, 53.56 is the range we are looking at and there is no real movement beyond that. But, if we see actual progress on the investments front and some of the stuck investments going through, we could see a positive surprise.
Of course, politics and all that comes in the election year and all the headlines which keep hitting us periodically can take us to the upside. That wouldn't be a real shock to the market. I think the market is prepared reasonably well for 56-57 on the dollar rupee.