Nov 15, 2012 06:17 PM IST | Source: CNBC-TV18

Don't expect runaway rally in bond mkt: Moses Harding

Moses Harding of IndusInd Bank expects yields on benchmark bond to hover in the range of 8-8.25 percent for the next six months, considering that there will be two rounds of 25 bps cut by March 2013.

Moses Harding of IndusInd Bank expects yields on benchmark bond to hover in the range of 8-8.25 percent for the next six months, considering that there will be two rounds of 25 bps cut by March 2013.

"It is not going to be a run away rally in bond market despite rate cut expectation because RBI might time the rate cut and the resultant rally by cutting the HTML," he said in an interview to CNBC-TV18.

Meanwhile, he sees the Indian rupee to get into a bullish mode once fiscal deficit issues are sorted. "Even if the market gets a medium-term comfort the issue of dealing with the fiscal deficit, the rupee will get into bullish mode. The rupee has to stay steady to strong till our inflation issues are addressed," he elaborated.

Further, the dollar index is likely to slip below 78.60 levels in the next two-three months, he added.

Below is the edited transcript of Harding's interview with CNBC-TV18.

Q: How do you see bonds moving from now up till December 18th, do you think that the indications that the OIS markets are that a rate cut might come?

A: The cues in the bond market is next, the support presently is coming from the expectation of OMO and rate cut action on or before January. Also, on the negative side we have pipeline auctions, possible overshoot in government borrowing this year and also cut in held to maturity (HTM) limit from 25 percent to 23 percent.

It is not going to be a run away rally in bond market despite rate cut expectation because RBI might time the rate cut and the resultant rally by cutting the HTML. One cannot afford to have 25 percent HTM when statutory liquidity ratio (SLR) requirement is 23 percent. I look at 8-8.25 percent band for the next six months taking into account two rounds of 25 bps cut by March 2013.

Q: Do you think that the best is over for the rupee considering that the strong appreciation that we had seen in the past two-three odd months we are back at 55 odd mark. What is your range till at least the end of the year?

A: The bearish trigger for the rupee was from disappointment in the last monetary policy. We have already seen rupee down from below 52.5 to above 55/USD. The rupee is very down heavily by weak domestic cues. We know that the issues are from growth, fiscal deficit and inflation.

While we were relying heavily on controlling inflation is crossing a negative impact on growth and fiscal deficit and thereby giving headwinds to inflation. Unless we shift our focus to growth and fiscal deficit through low interest rate and surplus liquidity and strong rupee, I do not think we get a quick resolution to inflation.

Q: Would you not be more worried about the trade deficit number. The October number at USD 20 billion is the highest trade monthly tally. Do you see that kind of pressure because exporters are not earning enough, FIIs are there but there isn’t that much of a flow? But if the import bill is growing like this and the trade deficit is so obvious do you see that pressure of people coming into buy dollars?

A: The current account deficit is an issue and it’s an issue for the last couple of decades.

_PAGEBREAK_

Q: Trade deficit is a new issue altogether, at USD 20 billion it is a new high so are you seeing that as a trader the pressure for dollars coming in?

A: Basically on the trade account there is pressure on exports and that’s also external driven, reduction in demand on India’s goods and services from the Western market is an issue. These issues are driven by external cues and I do not think RBI has any control over addressing the current account deficit (CAD) issue.

They can try it breach the gap in the trade in current account through adequate flows into the capital account and drive a steady stability and strong rupee so that the forward market also is coming to supply driven mode.

The impact of CAD can be diluted or reduced through forward market and capital account flows. That is what RBI can do at this moment; otherwise it’s a medium to long-term structural issue wherein you cannot give a resolution in the nearer and short-term.

Q: How do you expect the rupee to move? Do you think now we do not see 53 and 52 again, is there a chance of that 57 getting tested shortly?

A: The issue is internal. The macroeconomic dynamics are weak, so there has to get resolution to growth and fiscal deficit and that will drive the rupee into stability with the bullish mode. The issue is how quickly the political and monetary environment is going to change to support fiscal deficit. Even if the market gets a medium-term comfort on this, rupee will get into bullish mode.

The rupee has to stay steady to strong till our inflation issues are addressed. The rupee has to stay stable to attract offshore investments. This is a very critical issue as we sort out our current account deficit issue. The government and RBI have to join hands and walk together to give a positive vibe into the market. The sentiment was positive till running into the last policy.

Q: What is the level you are working with for the dollar rupee and it seems like the pound rupee is at scarier level around 87 per pound. Would you have a view on that?

A: In the near term the dollar index has rallied from 79.60 to over 81 and that is because of the fiscal cliff issue. When we get issues to that, dollar will get into a bearish mode. Now there is talk of QE4 and the Western markets will continue to remain in zero interest rate regime, given excess liquidity.

Dollar is going to remain bearish into the medium to short-term. As of now because of the issues both in the US and euro zone, pound is getting stronger. There is not enough liquidity in the pound so one cannot read too much from the pound movement.

What we focus on is the dollar index and the euro dollar. This is the correction process, once the issues on fiscal cliff and QE4 comes up dollar will again get into bearish mode. I see the dollar index below 78.60 in the next two-three months.

Sections
Follow us on
Available On