53-54/$ is fair value zone for rupee: Nomura India

In an interview to CNBC-TV18, Vivek Rajpal, rates strategist, Nomura India says, 53-54 is the fair value zone for the rupee. "Rupee should stabilise around that. However, overshooting, undershooting can never be ruled out," he adds.

Below is the edited transcript of his interview with CNBC-TV18's Mitali Mukherjee and Sonia Shenoy. Also watch the accompanying video.

Q: What kind of appetite are you sensing on the special auction? How high the interest is?

A: As far as the auction is concerned, we can see a moderate demand on the gilts, sovereign papers. However, the demand for the infra limits should be muted. Overall, there is still uncertainty, as far as the macro environment is concerned, as far as the policy reform is concerned. So, it will not be as if investors will just go gung-ho about getting the limits. However, we may see a moderate demand on the sovereign bond side, the gilt side. On infra side, we expect a muted demand.

Q: On the special auction, how would you categorise moderate demand? Who is it coming from? Is it only long only investors? Will that USD 5 billion get successfully mopped up or do you think even that is going to be a stretch?

A: One should see whole of it getting mopped up, but idea is at what price. One should expect moderate pricing. As far as the investor base is concerned, it should be similar set of investors. However, a small uptick from long only investors can also be there.

Q: How is the liquidity situation generally, right now, in the bond market? Has some of the pressure eased off?

A: Yes. Interbank liquidity looks comfortable. According to our calculations, the total system liquidity is around Rs 60,000 crore. That is close to the comfort zone of RBI. That effectively means that there will be less of open market operations in this phase, maybe in July and August. That may be one of the reasons why the backend yields may see a tactical rise over a month or so.

Q: What kind of levels do you think we will see on the benchmark between now and the next policy, given the point you made about the fact that there is probably no OMO window coming in?

A: Because there is no OMO window, one can expect 8.25-8.30% levels on the 10-year benchmark. However, at those levels, one should see investor demand. I don’t expect it to go much beyond those 8.30% levels.

Q: The big strength, in the last three days, has been on the rupee and that’s come with quite a bit of speed as well. What are traders putting it down to?

A: There are many factors that are coming into play. Rupee was under pressure. It was the biggest underperformer, so starting point also matters. I think there are two main factors which are contributing to the strength. One is the global risk-on kind of an environment, especially after the EU Summit. Then there is a hope of rate cut from ECB, RRR cut from China. That should keep the risky assets go on for some more time.

Two, there is a hope on the policy reforms front. There was a bad phase that’s started up at state elections. Market is hopeful of reforms, especially post July 19 presidential elections. So, I would assume these two factors are contributing to the rupee strength.

Q: Some of your peers have already started alluding to the 50 level. In the near-term, how much of a recovery would you expect to see on the currency?

A: It depends a whole lot on how the global risk environment pans out. However, one would assume that if some policy reforms come along, we should see a gradual appreciation kind of a scenario. We think 53-54 is the fair value zone. That’s where the rupee should stabilise. However, overshooting, undershooting can never be ruled out.

Q: How do you think the money market is approaching the next policy? With the yield target that you set, do you think it’s factoring in a no action kind of policy again or are people talking about some kind of 25 bps move?

A: There is an uncertainty, as far as the rate cut is concerned. Our economics team is not expecting any rate cut on July 31 because there will be some pressure on the headline inflation as we are expecting food prices may impact the headline inflation.

However, the most important aspect at the moment, as far as the backend yields is concerned, as far as the 10 year benchmark, is concerned is whether we are in a rate cut cycle or not. So, at the moment I am not assuming any rate cut on July 31. If we get a rate cut, we will definitely see bonds rally even from the current levels.