Where does StanChart see Re trading in short-medium term?

Excerpts from Markets Midday on CNBC-TV18 Watch the full show »

Anant Narayan, MD- Regional Head of fixed Income & Currency Trading - South Asia, Standard Chartered Bank, in an interview on CNBC-TV18 says the rupee has shown a reasonable amount of spirit to the dollar, even though the medium-term fundamentals are negative for our currency.

"In the short-run, we would probably, see a range on the rupee to maybe Rs 45-45.5 till March end but given the medium-term negative fundamentals on the rupee which should translate to actual flows by the second quarter, we should see Rs 46-46.5 by June end," he says.

Below is a verbatim transcript of Anant Narayan's interview with CNBC-TV18's Latha Venkatesh and Reema Tendulkar. For complete details watch the accompanying video.
 
Q: The rupee has shown reasonable resilience. The dollar is expensive by about 0.20-0.25 paisa today; nevertheless, Rs 45.10 or Rs 45.15 is not a very expensive dollar rate, considering, the price at which crude is trading. What's your near-term trajectory for the rupee - does it get weaker at all till March 31 or will it hold?

A: What has happened is that the balance of payment equilibrium has become pretty precarious over the last few days which means that positioning and actual flows can really impact the market a lot more than basic fundamentals. Medium-term fundamentals are clearly negative for the rupee.

Oil prices mean trade deficit is going to be under pressure and the current equity market uncertainty means capital account flows are under question as well. But short-term flows and positioning, probably, support the rupee in the short-term. We really don't have outflows from the foreign institutional investor (FII) as yet. On the contrary, we have had some talk of FPO money coming in, foreign direct investment (FDI) improving, perhaps, debt money coming in on the FII side etc.

Plus the market does not seem to be positioned short dollars as yet, probably, long dollars. There is no panic buying of dollars happening. In the short-run, we would probably, see a range on the rupee to maybe Rs 45-45.5 till March end but given the medium-term negative fundamentals on the rupee which should translate to actual flows by the second quarter, we should see Rs 46-46.5 by June end.

Q: That's when perhaps the BP money will start trickling in? From what one understands, the preliminary indication is the money is coming in next year, that USD 6-7 billion is what the market is banking on?

A: That's right. What will happen is that the overall flows will still be negative for the rupee once they start hitting. Yes, there is the BP money to come in but we must remember that the huge success that we saw on the FII front in the inflows last year is unlikely to be repeated this year.

The trade deficit will probably, start to widen again into the new fiscal. That should negate the impact of the BP inflows. We are not really calling for a dramatic depreciation of the rupee. Things still remain in balance on an overall Balance of Payment (BoP) sense. Actual large flows either side can impact the rupee quite a bit.

Q: Do you see oil companies coming in and buying dollars at all because there is this peculiar trend in December and January of oil imports actually falling and contracting, both, month-on-month and year-on-year. How does that tally with the situation on the ground? Are they not big dollar buyers?

A: We see them buying dollars. We are not sure how to explain the numbers. In December, which was quite interesting, all we can think is the numbers at the moment probably would adjust over a period of time. We are still using petrol and diesel to drive our cars and not water. I guess the import bill is going nowhere.

Q: How do you expect the yields to pan out on the bonds? We got a bit of a rally last week, but will that fizzle out?

A: In terms of positioning, the fact is we aren't really seeing any supply of bonds coming in the short-run. Deposit growth means that statutory liquidity ratio (SLR) demands for bonds are going up.

While there are question marks about the fiscal deficit the next year and the actual size of the borrowing program which a lot of people expect to increase as the year pans out, the fact is the lack of supply and the positioning being on the lighter side means that yields will probably struggle to go up till March end and we really have to wait for the actual supply to hit before yields starts to go up.

Q: What do you make of the bond markets when the actual supply hits? It will we Rs 48,000 crore every month or Rs 12,000 crore every week starting April 1. How is the market positioned for that? Say for April and May what will be the 10-year range?

A: Because we have not had supply for such a long time, one would expect that in April the supply would be absorbed without too much of a problem. One also needs to see how liquidity pans out in the new fiscal year. Real rates, in term of CD rates and CP rates are pretty high at over 10% plus at the moment.

If liquidity does come back into the system that could provide some support to the bond markets as well. But medium-term if one were to look at from a perspective of May and June, I would look at the 10-year moving between 8.25 and 8.5 range, given as you mentioned that we will have a rapid amount of supply coming and hitting us.