Gilt auction will be success despite US holiday: Harding

Below is an edited transcript of the analysis. Also watch the accompanying video

Q: What do you expect from the gilt auction tomorrow? How much of a relief could it provide to the rupee?

A: The demand for gilts at very attractive yields will be of interest to FIIs. Now that the investors' basket has grown bigger, I think the auction will be fully subscribed and there are also signals that it's just a matter of time before the RBI shifts into a growth-supportive monetary mode.

So, with all this together, I think the yields are giving signs of topping out and given the short-medium term bullishness, there should be appetite from the FIIs.

Q: So, if the entire USD 5 billion of the Gsec limit is fully auctioned, do you expect further gains in the rupee with today's rally close to 1-1.5%?

A: The market has completely unwound its pre-monetary policy weakness. The rupee was at a high of 54.92 before the mid quarter review in June and fell to 57.32 on the RBI failing to meet expectations.

The market also unwound on the hopes that the Prime Minister's direct supervision of the finance ministry will meet expectations. If the economic reforms are not translated into reality, the rupee will become bearish.

It's very risky to stay long on the dollar above 57. In my view, I think below 54.80 and upto 54 is not prudent to stay short on the dollar and its time for importers to hedge their one-to-three month payables if they get it at a forward value below 55.

Q: There is some concern that tomorrow's auction may not see too much of a demand because of the three year lock-in clause and also because July 4 is a national holiday in the US. So, are you concerned about the fall in appetite?

A: I am confident that the auction will go through despite July 4 being a US holiday. The only issue is that rupee has fallen from 57 to 55. That's a bit of a dampener because 57 was a very good value for FIIs to take a short position on the dollar.