10 year bond yields to hover in 8.15-8.40% range: StanChart

Anant Narayan of Standard Chartered Bank feels that finance minister P Chidambaram’s statements about reducing the widening fiscal deficit is encouraging for the markets. The market is building up hopes and is focusing too narrowly on diesel price hike, he added.

Meanwhile, given the improvement seen in the liquidity situation over the last few months, he doesn’t expect the central bank to announce any open market operations (OMOs) in the near future. "In that case the relentless supply coming in from the government, Rs 15000 crore a week, week after week is going to take its toll on the 10 year bond yields," he added. So he expects the bond yields to hover in the range of 8.15%-8.40% going ahead. Below is the edited transcript of Narayan’s interview with CNBC-TV18 Q: What exactly is your expectation of the rupee post all of these statements and the positive statements that came out from the finance minister (FM) yesterday or do you think that it is the euro and the risk rally that is helping us today? A: On both fronts we have some positive news. Globally there is a risk on, euro has climbed up. There is a move towards risky assets globally. And plus of course we saw some pretty encouraging statements coming in from the finance minister yesterday, somebody whom the market can take confidence from. But a lot of things have to happen in real terms especially on the domestic front for the trend to sustain and for some confidence to come back into the markets both on the fiscal and growth front. On the fiscal front, the market has been expecting some action, particularly a diesel price hike for a long time. May be that’s a bit overhyped that particular point about the diesel prices. But some kind of control has to be demonstrated. The fact that we are cognizant of the issues on the fiscal front, I don’t think we need miracles there. But we need some action to show that there is something to keep a lid on the fiscal deficit from going away. On the growth front action is required as well. A lot of the issues both on the current account as well as on the fiscal front, find their genesis in the lack of growth particularly infrastructure and investments. We do need things happening there which give a fillip to actual infrastructure investments in the country. Both these are required to give market the confidence that the worst is behind us for dollar-rupee. Expect that to pan out hopefully over the next few months while things will remain choppy. Hopefully, we will see a level below 55 in the months to come. Q: Is the market still hopeful about a movement on diesel after the parliament session and the Finance Minister spoke about a fiscal consolidation road map? Can we lend any credence to that? Is anything possible on the fiscal consolidation at this point? A: It definitely is. Maybe the market’s focusing too much narrowly on diesel prices, sure that would be a good place to start given that’s an obvious area of subsidy. But some control and some ways of showing higher revenue, which sort of address the overall fiscal deficit is what the market is looking for basically to assuage rating agencies. I don’t think the rating agencies are looking for miracles. They are looking for a sense that people are aware of the issues relating to the fisc and are taking valid steps towards controlling that. There is definitely an expectation and hope in the market that there would be some concrete steps to follow up on the very positive statements, which came out from the Finance Minister yesterday to address the fiscal front. We need something on the growth front as well for macro economic stability. _PAGEBREAK_ Q: What exactly are you making of the yield then because the yield has come down to around 8.18% versus an intraday level of 8.28% yesterday? A: The liquidity has been improving over the last few weeks and months. Very welcome for the banking system which is anyway reeling under high amount of gross NPAs and restructuring. So the deficit at the moment is within that 1% of NDTL corridor which the RBI had indicated earlier and the chances are, with the RBI paying a dividend to the government that might come down even further. Now we are looking at a situation where the overnight rate might move between the corridor of the reverse repo and repo on few days during the fortnight. Don’t expect it to sustain throughout there, but on a few days towards the later part of reporting fortnight you could see call come down below 8%. This means that the average for the fortnight could be below 8%. Now that’s where the system as a whole is taking some relief from and building expectations on that front. The fact that the 2G auction timelines aren’t clear also puts out one issue which could have created issues on the liquidity front. Broadly this is a liquidity game. But otherwise the pressure on yields will remain. Unfortunately in a very vicarious manner because liquidity is improving, chances are that we won't see OMOs from the RBI in the near future. In that case the relentless supply coming in from the government, Rs 15,000 crore a week, week after week is going to take its toll on the 10 year bond yields. Expect bonds to range between this 8.15%-8.40% kind of range. Q: So far we had been waiting for this official drought declaration. We have it now. Do you think most of the negatives that were to be out on the macro are already out and estimates have bottomed out particularly on the rupee front do you think the current account deficit and the BOP issues would be behind and the rupee could find a floor from here? A: The issues aren’t behind us as yet clearly. The drought I guess in a direct impact is not very large. Every economist will tell you that the proportion of the economy which relies on monsoon was quite low. But it does have an impact on inflation and inflation expectations. The current account deficit issue still remains. The overall balance of payment still remains precarious. The fact that oil prices have come up in the last couple of weeks again don’t help the cause. It is contingent on some steps being taken to bring back the growth story into focus into India. The fact remains that we need that growth story to draw in capital; to draw in that confidence from overseas investors to cover what will always remain a deficit on the current account front. Is the worst behind us? Clearly with dollar-rupee at 55 plus, we will see an improvement in current account deficit automatically because non oil imports will come down. But to really tide across the Fx problem, we need that growth confidence to come back amongst the investor community, which at the moment is not yet completely there. There has been an improvement in the last few weeks. We need to follow that up with actual action from the ministry to bolster that confidence. Q: Worst case scenario what sort of levels would you work on on the rupee and conversely what would your upside target be? What would your most optimistic target be for the rupee? A: We think the long-term fundamentals of the country haven’t gone away. It has almost become a cliché when we talk about demographics and the fact that there is a huge infrastructure story pending for us in the country. But the fact is that the story is there. It is going to make its way out into the open at some stage or the other. Broadly, going by that story and going by the fact that that will draw in capital into the country, do see the rupee appreciating and hopefully the worst of the rupee is behind us in a base case scenario. The official estimate for us is 55 for dollar-rupee by end of March. Personally, I would look forward to something like a 53, closer to a 53 on the base case. The risks are there. You can't deny the fact that if we have moved from 44 last July to 57.30 at the highs, the risks are on. If we do see a risk off scenario coming back in the global markets, if we do see a rating downgrade from S&P and FITCH which affects our overall sentiment, you could see an impact coming through the Fx markets. At the moment, we don’t think that’s the base case scenario. We think India has the potential to tide over this and head back to a more stable fx regime.