Jul 25, 2013 12:54 PM IST | Source: CNBC-TV18

Don't see further RBI liquidity tightening measures: Nomura

Vivek Rajpal, Rates Strategist, Nomura India believes that the liquidity tightening measures by RBI are temporary in nature. However, he does not expect any further tightening in the upcoming policy.

Rupee has been falling significantly and crossed it's all time low mark of 61 to USD  on July 8, 2013, after which RBI took various steps to curb rupee volatility.

Vivek Rajpal, rates strategist of Nomura India feels that RBI moves are not sufficient for a meaningful appreciation in the Indian currency and a pullback is highly unlikely. He believes that the liquidity tightening measures by RBI are temporary in nature and any further tightening in the upcoming policy is unlikely.

"If governor Subbarao says that it is a temporary measure then it will be a relief to the market," Rajpla told CNBC-TV18 in an interview.

Also read: RBI steps to hit growth, don't touch banks now: Baer Cap

Below is the verbatim transcript of his interview to CNBC-TV18

Q: What do bond market participants expect to see on the yield? We have almost got into 8.5 percent mark. Is there a complete reset of the range going into August?

A: Yes, there is a complete reset of the range; in fact volatility is expected to be here. Nobody is in a hurry to buy because there is a continuous supply in the primary markets over the next month. So, there is uncertainty as well in terms of what will Reserve Bank of India (RBI) do though the consensus.

We expect that the liquidity tightening measures are temporary in nature and we will not see any further tightening measures as such in the upcoming policy. The volatility in the secondary markets can be high. So, market has yet to achieve the equilibrium level, which it has not and it is still volatile enough. Only after certain point of time market will restart buying bonds until then market will find its own levels.

Q: If in the monetary policy statement the RBI Governor says explicitly that these are temporary measures and does not do any further tightening like a cash reserve ratio (CRR) hike, do you think the yield will pullback substantially closer to 8 percent levels?

A: No, I do not think so. There are two reasons:

1) What he has done is more than a CRR hike. If liquidity adjustment facility (LAF) borrowing window is reduced to 0.5 percent of net demand and time liabilities (NDTL) then you have effectively made policy rate gone up from the repo rate levels of 7.25 to 10.25. However, what he has done is equivalent to 300 bps of hike already.

2) If Governor Subbarao says that it is a temporary measure then it will be a relief to the market. Relief but it will kind of reinforce the view which market already has; it will not be something which will be new to the market.

So, significant pullback is very difficult to expect rather market would be looking in further details and will try to understand what is it that RBI will look before reversing these measures. I think in the current situation probably the stability in the currency markets will be one of the things that we may look to hear on from Governor in terms of finding a trigger when he will reverse the moves rather than whether these are temporary or permanent.

Q: There has been huge redemption from fixed income mutual funds and some of the fund managers seem to believe that at these yield levels may it makes sense to go for an accrual base plan where accrual rates would be higher now for non-gilt kind of income funds. Does it make sense or is it too volatile to attempt something like that?

A: I think at this moment anything is little to volatile, but having said that for a long-term and medium-term horizon the valuations are looking okay in all the fixed income products. If one has a capacity to not worry about mark to market losses in between then these are attractive levels.

However, those who care about mark to market valuations then this is a time to avoid too much of a boldness in fixed income market.

Q: What about the currency market. That has not roared back with strength either, it is at about 59.20/USD this morning. Do people expect to see much shaper appreciation once the month end demand issue are sorted out or is this looking like the quantum of the pullback for the rupee?

A: A sharp pullback appreciation or that kind of a story has to come from the global market rather than the Indian markets. I think whatever RBI has done is not sufficient to create an appreciation in the rupee. If we need to see a significant appreciation, we need to see some unwinding of this global long dollar story and which can only come if the beginning of the quantitative easing (QE) tapering expectations goes away.

So, I personally think that at this moment everything lies around the QE tapering expectations as far as currency is concerned. Too many things are in the hands of Indian policymakers. We can try our best to outperform the rest of the market. The broad direction will still determined by the global markets.

Q: How long do you expect short-term rates to remain significantly high because at that end of the market we are seeing more than 10 percent rates? What could it mean for liquid fund investors?

A: The short-term rates are expected to remain high. However, I must also say that at current levels they are looking good in terms of carry products. For example one year T-bill cutoff came higher than 10.25 percent, which is the current operative rate, which is the marginal standing facility rate.

So, I am willing to believe that at current levels frontend rates may stabilize, but its still a carry product to say so as one can have a funding at rates lower than that. However, the frontend rates will remain elevated at least for two months from hereon.

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