Critical to assess data ahead of RBI Oct policy: HSBC

Andre De Silva, Managing Director, Head of Asia-Pacific Rates, Global Research, HSBC feels tough the central bank’s move to further cut marginal standing facility (MSF) rate came as a surprise, but by doing this, RBI has kept its promise of rolling back some of its liquidity tightening measures it had announced earlier.

RBI had restricted the amount of money the banks could borrow from it when there was a run on the rupee to just Rs 37,500 crore. The remaining money had to be borrowed at the MSF rate which was originally 300 basis points higher than the repo rate. In an interview to CNBC-TV18, he said that in the run upto to the next policy meeting which is scheduled on October 29, macro data like trade data and CPI should be closely watched. Like most market experts, De Silva also foresees a repo rate hike if inflation remains at elevated levels. Below is the edited transcript of Andre De Silva’s interview with CNBC-TV18 Q: Yesterday we had a surprise cut in marginal standing facility (MSF) rate that the Reserve Bank of India (RBI) has been keeping high for sometime now. What is your anticipation of the next move from the RBI? A: I understand that MSF is a surprise, but in reality RBI including the new Governor has promised that when the country did stabilise they will rollback some of these liquidity measures and they have done that albeit after market hours yesterday. In terms of what they will do next is critical between now and the next meeting, which is on October 29 in terms of data releases in particular trade data and on October 14 is the consumer price index (CPI) data release. If it still remains stubborn then central bank will certainly need to anchor inflation expectation and have to deliver repo rate rises. So, at the same time further unwind of liquidity measures, but still hike rates in terms of key policy rates. Q: Where does it leave the 10-year bond for instance? You do not see it slipping much below the current 8.5 percent? A: That is correct. Whilst we have seen some relief in recent rebound in currency, bond yields have remained very stubbornly high. Even as liquidity measures are targeted towards buying back bonds, at the same time there is still higher interest rate coming in the form of key repo rate rise. There are also supply concerns and fiscal stance still remains a question. So, on that basis bond yields are likely to remain stubborn highly for now. It’s more the front end slightly beneficial rather than the long end of the curve. Q: What about the currency, do you think that the currency has stabilised because there is a view in the market that the oil demand is still not factored into the currency. So, once that gets factor in there might be some amount of volatility or incremental depreciation? A: I certainly wouldn’t have ruled out volatility indeed. One could argue that some of these measures done recently might be a bit premature. I stress there is an absolutely need to anchor inflation expectations. HSBC anticipates RBI to deliver some of that by rating rates again in terms of key policy. In the absence of that yes, there will be more volatility, but there will be a shift away from not just RBI but also election scheduled next year and what the government does in terms of fiscal prudence and how soon some of the measures that have been announced recently are offset. For now the order of the day is to focus on some of the measures including the RBI’s Fx-dollar swap facility and we are getting quite a lot of dollar inflows. My report suggests something up to 3.7 billion so far and that could increase up to 15 billion in the next couple of months. That provides some temporary support but beyond that the fundamentals will certainly become much more critical.