Don't rule out reverse repo hike in April: StanChart Bank

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » RELATED NEWS Bond prices weak on imminent govt borrowing programme 10-year yield seen between 7.97-8%: Suresh Prabhu Nifty BSE | NSE 31/05/12 Are Mutual Funds betting on Nifty?

In an interview with CNBC-TV18, Anant Narayan of Standard Chartered Bank, spoke about his outlook on the economy.

Here is a verbatim transcript of an exclusive interview with Anant Narayan on CNBC-TV18. Also watch the accompanying video.

Q: What is your take on the bond markets? We have seen 8% for one day then the bond market may find some kind of support. How do you enter the borrowing season on April 1? Do you think we will not cross 8 and we will enter it on this side of 8?

A: There are clearly some concerns amongst the market participants about how the borrowing program would go through. It is a large number. It is along the lines of expectations but never the less on an absolute basis it's a large number. We would probably see some front loading of the borrowing program as well. There are a lot of redemptions due in the first half. So timely with that, we might see a lot of supply as well.

One would expect as much as Rs 300,000 crore of gross borrowing to go through in the first half April-September. This is a scary number. So chances are that once the actual supply starts, at the moment the market is positioned for that supply so that the market is reasonably light and there is no immediate supply until March end. So one doesn't know how it will pan out in the next few days, but once the supply actually does start then chances are that we will see yields going up and we could see a test of 8.25 or 8.50.

Q: Would we get 8.25% atleast in April? Do you get even 8.5% in April?

A: The trend would be towards direction and the other thing to load the supply which is clearly the overbearing factor in the market is that the economic data has been very positive as well whether it's the WPI or the IIP which we expect to print.

A 16 plus percent number coming up and things like asset prices land deals which people are talking about again, companies talking about hiring and salary hikes, a bit of signs of maybe signs that it's going beyond supply side issues to maybe some kind of endemic issues and inflation. So it is a worrisome period for the RBI. It has large borrowing program to manage. At the same time there are signs of growth and inflation seeping into the economy. So it will be an interesting time.

Q: On the rupee front off late, it has strengthened especially in the month of March, where do you think its headed say by end of June or by the end of this year?

A: For the end of the year we project a rate of about 42. Standard Chartered has been consistently bullish on the rupee. Our base case remains that I think there is a definite trend of money flowing in from the west to the east. India remains a favored destination. We will see blips up and down but our base case remains towards a stronger rupee.

Exports are showing up and maybe exporters aren't hedged enough. There are risks to any view and over the last two years, we have clearly learnt that we can't rely on base views. So maybe the political situation, which we are not talking about too much at this time, heats up but the base view remains strong rupee 42 towards December end.

Q: What are you expecting from the RBI in the fourth week of April? Are you expecting a reverse repo of 50bps?

A: The RBI might want to keep liquidity available for the time being since they have a large borrowing programme to support the government. Given the kind of data that we are seeing through the WPI, IIP, etc, I think they would show some movement on the interest rates. So I tend to agree a 50 bps or maybe a 75 bps rate hike on repo. Reverse repo cannot be ruled out into the April Policy.