Dec 28, 2012, 08.56 AM | Source: CNBC-TV18
In an interview to CNBC-TV18, Neeraj Gambhir of Nomura India gives his expectations from the RBI monetary policy expected in January.
Neeraj Gambhir (more)
MD & Head- Fixed Income, Nomura | Capital Expertise: Currencies
On the rupee's performance, Gambhir says the next movement in the rupee will be seen around the current account data. "We are expecting the current account to continue to widen in the next month’s data. That should provide another set-up or weakening bias to the rupee," he says.
Also read: Rupee near one-week high on capital inflows
Below is the edited transcript of Gambhir's interview to CNBC-TV18.
Q: Where do you think the rupee is stabilising? Is it around 55/USD or is there another wave of selling coming?
A: It seems like we are hovering around 55 per dollar. The next round or the next set of movement in the rupee will probably be seen around the current account data. We are expecting the current account to continue to widen in the next month’s data. That should provide another set-up or weakening bias to the rupee. It did feel like we were trying to make a new high, when level of 55 per dollar was broken. However, for the last two days, because of the equities, we are seeing it a bit strong.
Q: How much of an event is the fiscal cliff or the rupee-dollar equation because of how it might move the dollar index or the euro-dollar equation as well depending on which way it pans out? Do you think that might have a big bearing on the next week or so?
A: It is highly unlikely that we will see the full resolution of US fiscal cliff in the next week because it is largely a holiday week. Therefore, we may go into the next year and it could be another couple of months before the cliff issue is completely resolved. So, you could see the market in a bit of a risk-off mode over the next month to a month and a half as there is uncertainty around that US fiscal cliff.
Hence, the US dollar maybe a bit weak and hence, that could have a little bit of strengthening bias towards rupee. However, coming back to the fundamentals, I think the focus has to be substantially on the level of foreign exchange flows in the country. So, the correlation of rupee's movements with for example, equity market performance, large foreign direct investors (FDI) or news around FDI is going to be fairly large. Though the background risk-on, risk-off sentiment driven by US fiscal cliff will have a bearing, but the largest substantial impact will be on account of the flows.
Q: Foreign indirect investor (FII) flows though have been phenomenal this month. What are you picking up from the trading desk in terms of January?
A: The FII flows have been a bit surprising on the upside. There have been fairly substantial flows, given the fact that 2012 was quite a bad calendar year in terms of newsflow around India. Since then the story has certainly improved. We have seen the Lok Sabha (LS) and Rajya Sabha (RS) pass two important bills. We hope that the Budget session will take up the rest of the important bills and that should provide further impetus towards flows. So, clearly it is a portfolio and equity flow story. Given the fact that there is a reasonable reform momentum, we should see some continuation of those flows happening.
Q: How have you seen the yields moving now? They have softened upto about 8.10. Do you see it losing more ground in the run-up to the January monetary policy?
A: Yes, the government is clearly running a fairly large balance with RBI and if that balance continues, then the need for government to do additional borrowings may be somewhat lesser. That puts some kind of lid on the additional supply that the market has been worried about.
We are entering into the last quarter of the fiscal when typically the supply tapers off and we also have reasonable expectations around rate cuts starting from January policy. So, everything put together; lesser supply and fundamental rate cut story, should be supportive for the yields. I do expect the yields to move towards 8 percent and maybe go towards 7.90 by the end of this month. So, one could see another 15-20 bps rally in the run-up to the policy from here onwards.
Q: What is the bond market pricing in January going to be? Will it be 25 bps or 50 bps from the RBI or alternatively are they looking at hike only come March?
A: The expectations are fairly significant this time around, given the background that has been built up in the context of the last policy. Clearly, there is an expectation that January we will see a rate cut. There will probably not be a CRR cut, but we might see a repo rate cut. I think the median expectation would be around 25 bps. So, there is a possibility that we could see a 50 bps rate cut as well, if RBI chooses to frontload its monetary policy action, but I think there is a high probability of a 25 bps rate cut.