The current account deficit (CAD) narrowed sharply to just USD 300 million, or 0.1 percent of GDP, in the June quarter, driven by lower trade deficit on deeper import contraction, the Reserve Bank said today. The CAD, a key factor monitored while assessing a country's external position, had stood at a high of USD 6.1 billion, or 1.2 per cent of GDP, in the year-ago period.Speaking to CNBC-TV18 A Prasanna of I-SEC PD said that he doesn’t see the latest current account data to be entirely positive. “Private remittances have slowed down,” he said.
Regarding currency, he doesn’t think the RBI policy has had any noticeable bias on the rupee. In the last 6-12 months, the currency has been stable, he said.
He doesn’t expect a current account surplus for this fiscal year. One of the reasons for this outlook is the collapse in gold. “It is possible for gold imports to pick up in the rest of the year,” he said, adding that he is looking at a deficit for the full year.
Ananth Narayan, Head-Financial Markets, Standard Chartered Bank, said that the current trend of risk-on play should continue. “We are seeing inflows coming through,” he said, adding that FCNR repayment ought to be contained. He believes the RBI will continue to mop up dollars.
He expects to rupee to be at 66 against the US dollar by the end of this year.
He expects two rate cuts – of 50 basis points in total -- by the end of this fiscal year.
“It does look like rates will remain soft for long,” he said.Below is the verbatim transcript of A Prasanna & Anant Narayan’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy.
Sonia: Lots of cheer on the current account deficit front, how did you read in to the data and what do you expect here on?
Prasanna: We did expect a very low deficit or even a modest surplus given the kind of monthly trade deficit numbers we have been printing. The surprise actually is a bit on the negative side. If you look at private remittances actually it slowed down quite significantly more than what many industries could have anticipated. In that sense I wouldn’t say it is entirely positive.
Latha: It also indicates the fundamental strength of the currency in terms of flows. Will this be a currency that policy can easily weaken? I mean you will have to do too much of dollar buying you think since that seems to be somewhere in the minds of policy makers?
Prasanna: If you look at the last one year or so I don’t think Reserve Bank of India's foreign exchange (FX) policy has had any noticeable buyers. I think prior to previous two years you can say a gradual depreciation was being engineered but if you look at the last six to twelve months, the currency is more or less has been stable. So, it is difficult to say that they have any particular buyers.
However, in any case, in the very short-term, in the next one to three months, I don’t think it is pretty much in the control of RBI because foreign currency non-resident bank FCNR(B) redemptions are happening and of course they have covered it with the forwards book, but pretty much RBI’s focus will be on making sure that these redemptions go through without any disruption.
Latha: Are you looking at a current account surplus year FY17?
Prasanna: If you are asking for the full year do we project a surplus - the answer is no we don’t. We still project a deficit. You should understand that there was a collapse in gold imports in the first quarter we are not sure that is going to continue. That is one of the reasons apart from the other usually reasons of slower demand and therefore non-oil imports not picking up. It is possible that gold imports do pick up during the rest of the year and as I pointed out the remittances number has also slowed down, so definitely we are still looking at a deficit for the full year.
Latha: What is the sense, now the currency strengthens even more? Today of course it seems to have a double positive, the current account deficit number as well as the global dollar weakness?
Narayan: It does look like the current trend of risk on particularly for India should continue. Yesterday’s headline numbers on current account help as well. We are seeing inflows coming through, so notwithstanding the volatility we might see around the FCNR(B) repayment, which ought to be contained, the broader trend seems to be one off dollar inflows and therefore a strengthening rupee. Having said that I think the RBI will continue to mop up dollars given that the rupee is showing an overvalued rate against the 36 countries real exchange rate (RER). So, dramatic gains might be muted. However, the flows do like a positive rupee for now.
Latha: How positive does it get? Does it go to 66 per dollar, does the dollar get even cheaper than 66 per dollar?
Narayan: We are calling for 66.25/USD to be seen by the end of this year. So, that is the broad trend and trajectory we are looking at. I do expect personally though that the RBI will be there to mop up dollars aggressively as these flows come in.
Sonia: The consensus view is that there is a rate cut coming in the October policy. Would that be your view as well?
Narayan: We are expecting or pencilling in a 25 basis points rate cut on October 4th. We are asking for or we are calling for one more 25 basis points rate cut before the end of this fiscal year, so 50 basis points in all.
Latha: Where does that take the 10-year to? Already 6.8 is what many people are calling, I mean it is 6.84 so it is not a long call?
Narayan: If we do see two rate cuts then a rate between 6.50 and 6.60 on the 10-year cannot be ruled out. However, given the overall global growth prospects look pretty soft, globally inflation doesn’t seem to be a problem; in fact even the Fed has reduced its long-term growth prospects from 2 percent to 1.8 percent. Given this overall backdrop it does look like rates will remain soft for longer.
Latha: Rally in bonds today as well can’t be ruled out?
Narayan: We will see a rally, the longer end in the US and globally has come off. We have seen the Bank of Japan (BoJ) also come out with some extraordinary statements yesterday calling for targeting of the 10-year bond yield. All of this will lead to a softening of yields overtime. As the expectations for rate cut build on October 4th I think we could see a small rally in the run up. The joker in the pack of course is that we will be facing a new Governor this time around and we will have to wait and watch to see what his views are.
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