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Jul 12, 2012, 08.23 AM IST
Moses Harding of IndusInd Bank feels that excessive disappointment or hope build-up is adding to the rupee weakness.
The weak rupee continues to be under pressure and opened the day weaker at 55.90 a dollar on Monday against Friday's close of 55.42 per dollar. Although, the Indian currency temporarily recovered, it breached the 56 mark, touching 56.01 during the day's trade. Moses Harding of IndusInd Bank feels that excessive disappointment or hope build-up is adding to the rupee weakness.
"When there is some excessive disappointment or excessive hope build-up, the delay in delivery of the factor that built up hope gives an accelerated movement to the dollar index. We have seen the dollar index gaining post ECB rate cut and post that gain. But, because of the delay in realization of hopes, we are not hearing anything positive either from the finance ministry or the RBI. But the delay is causing the excessive weakness," explained Harding.
Although, Harding has a near term bearish outlook on the rupee, he holds the short term outlook as neutral. He picked a range of 55 to 56.50 for the rupee and believes that in the worst case, it would not go beyond 56.50, while in the best case, the rupee might appreciate to 55.
Speaking about the possibility of a rate cut from the RBI, Harding said, "I think rate cut is diluted and now RBI can move the rate down by 1%." He is also considering a range of 8.10 to 8.20% consolidation for bonds.
Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.
Q: Why this pressure on the rupee now? We are actually seeing slightly lower crude prices and even stock market wise we are not underperformers by any standards, if anything, slight outperformers. Why is the rupee under so much pressure today?
A: Rupee has been trading into excessive territory shifting from disappointment and hope from the domestic scenario. Rupee weakness above 57 was excessive and rupee recovery below 54.80 was also excessive. That is why I said it is very risky to stay short dollars below 54.80 and risky to stay long dollar above 57.
Q: But why this over performance or underperformance? Why this extra beta that is getting added to the rupee is it because of all the restrains of the Reserve Bank that the trading volume is lower and therefore impact looks higher?
A: When there is some excessive disappointment or excessive hope build-up, the delay in delivery of the factor that built up hope gives an accelerated movement to the dollar index.
We have seen the dollar index gaining post ECB rate cut and post that gain. But, because of the delay in realization of hopes, we are not hearing anything positive either from the finance ministry or the RBI. But the delay is causing the excessive weakness.
Q: In that light, do you think that the downward spiral for the rupee has begun again and what sort of range would you possibly be working with?
A: I think I am looking at rupee, in the worst case scenario, not beyond 56.50. The best case scenario would not be beyond 55. So 55 to 56.50 is the range I will put and if the expectations are realized, then we should go to 53 to 53.50 in the short term. The near term outlook is bearish while the short term outlook is neutral.
Q: The other thing is the slight rally that we have seen in the ten year today at around 8.13% versus the closing of around 8.15% on Friday. What is keeping the optimism high on the yields in today's trade? Is it a possibility that there could be an OMO announcement?
A: Actually it is a liquidity driven rally. It has come down to the RBI's comfort level and the new ten year bond at premium will definitely be attractive. So the weakness towards 8.18-8.20% was bought to push it to the discount.
It is a consolidation around 8.15%. Market is looking at what will happen in the July monetary policy. If the trend is for operative policy shifting from repo rate to reverse repo rate then it is positive for the bonds market and that is being build in at this stage.
Q: What explains this huge liquidity swing - is it just export refinance that is Rs 18,000 crore? That is what the RBI said in the last money market report. We were Rs 70,000 crore or Rs 80,000 crore short - is it all government spending that has made the money market a near surplus market?
A: People maintain higher product at the start of the reporting fortnight cycle and export finance came in from July 1. Credit demand on rupee is not picking up to that extent and people are shifting to dollar borrowing because of that attractive rupee value.
All these combinations have eased the liquidity situation and government borrowing is also there. I think going forward, in my view, before the end of September we should see the operative policy rate and the reverse repo rate.
Q: In that case, there is no rate cut?
A: I think rate cut is diluted and now RBI can move the rate down by 1%.
Q: How do you expect the liquidity scenario to pan out in the next couple of weeks then?
A: By September we should go into surplus liquidity and RBI may not do a CRR cut because they have to keep the OMO option open to arrest any spike in bond yields. So liquidity injection will be through the combination of OMO and general liquidity coming into the system.
Q: By any chance you think the RBI will sell bonds in the OMO?
A: No. I don't think so. RBI will like to keep the ten year bond yield around 8% till inflation worries are out of the way. The headline inflation and inflation adjusted borrowing cost that is the new benchmark that RBI is looking at and that is going to stay at elevated levels. So RBI will not come in with a combative or loose monetary policy in the short term.
Q: When we have the IIP numbers coming out this week - any range that you will be working with for this week in particular for the bonds?
A: I will look at 8.10 to 8.20% consolidation.
May 25 2013, 16:36
- in Technicals
May 25 2013, 16:36
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