See rupee in 54-56 range in near-term: Citi

In an interview to CNBC-TV18, Gaurav Garg, Asia FX and rates strategist at Citi and Ashok Gautam, senior VP and head, global markets, treasury at Axis Bank, talk about the money markets and give their outlook going forward.

Garg says, rupee should be in the range of 54-56 in the short-term. “If we see the positive reforms come by, the fuel price deregulations, the FDI in retail, aviation and insurance sectors then the rupee can break 54 and then the next move will be 52.50-52 range,” he adds. Gautam agrees with Garg. He sees rupee in 54.22 to 56.20 range for sometime. Below is the edited transcript of the interview with CNBC-TV18's Mitali Mukherjee and Sonia Shenoy. Also watch the accompanying videos. Q: What is your view on the ECB action? Garg: If we talk about the ECB action yesterday, the policy cut was very much in line with the market expectations. It was the deposit cut to 0% which took markets by surprise. This brings ECB very close to the verge of quantitative easing (QE), which ECB and BoE have abstained from doing until now. That exacerbates the need for euro to play the role of a funding currency even further. Now, the behaviour of euro as the funding currency for the risk currency is very clear with euro-Aussie and euro-kiwi trading at all time lows. So, this thing will materialise even further. Q: Are you getting the sense that anything that the local authorities do in order to check the slide on the currency is going to be piecemeal and very limited in its impact? Garg: If we talk about the sharp rally, which India saw this week, it was both led by the domestic as well as the global factors. The sharp rally in INR was very much shared by other global risk-on currencies as well. The move was, however, exacerbated because of the domestic factors, the expectations of regulatory measures coming in with prime minister taking up the finance ministry. The expectations are yet to materialise. As in the past, the government has not expected to deliver on its promises. If it does then it will be a positive boost. But anything coming before the presidential elections looks unlikely. As is evident from the FII action also, they increase the limit by USD 5 billion, but got undersubscribed and 72% was raised because the market is waiting. The auctions are very regular. They are waiting for things to materialise before they go all in. So, I don’t think that the impact is limited, but things have to be shown properly that yes, this time it is true and they are going to happen before we see any kind of concrete action. Q: Where do you see yields in the near-term? Gautam: The supply pressure now in the Q2 is going to be very high. In Q1, even though the calendar was blocked with the new issues, but because of the redemption as well as the OMOs in the main market as well as the secondary market, we saw only a net supply of Rs 60,000 crore. Going forward, in the Q2, our estimate is that with the calendar, which we have already seen and the redemption, which is already scheduled, the net supply would be Rs 185,000 crore. That is a very big number. Going forward, as the liquidity eases in a market and the Liquidity Adjustment Facility (LAF) numbers are already coming down, they were yesterday at Rs 14,000 crore, the OMO expectations now seem to be diminishing. So, this will put pressure on the yields going forward. _PAGEBREAK_ Q: Some polls as well indicate that analysts have lowered their bearish bets on the rupee from hereon on expectations of some reforms to come through now that the prime minister has taken up the finance minister’s post. Do you think we have seen the worst at the rupee at that 57.30 level? What kind of trajectory do you hope to see in the next couple of months in terms of a target? Garg: 57.32 was clearly overstretched. If you look at the behaviour of INR, it is very correlated to the equity gains. INR has clearly underperformed equities for quite some time. The positive impact from the oil decline was also to show up. So, for the short-term, 54-56 should be the range, if everything goes by. If we see the positive reforms come by, the fuel price deregulations, the FDI in retail, aviation and insurance sectors then the rupee can break 54 and then the next move will be 52.50-52 range. Q: The fear is, now that the rupee has moved on the upside, the RBI will not be aggressive enough in terms of more OMOs from hereon. Can you directly correlate the rupee with the movement that we have seen or the expectations in the form of OMOs? Gautam: What you have said is absolutely right. Some of the OMOs, which were coming, were also to sterilise the intervention in the rupee market. That is very much evident. Going forward, in Q2, we will see less and less of OMOs. I agree with the other guests that we will be seeing the rupee move in 54.22 to 56.20 range for sometime. On the expectation basis, the rupee gained from 57 to 54.10 or so, but actual money flow will determine the next course of rupee direction. Q: What is the bond market going into the next policy meet expecting? Is there still talk of 25 bps action or do you think it is going to be a standstill policy? Gautam: We have already seen ECB cut as well as a PBOC cut yesterday. Going forward, we will have to look at two numbers, which are going to come one day after each other i.e. index of industrial production (IIP) as well as inflation. But the way it looks like if the inflation will remain in the range it is there maybe in this whole quarter, probably rate cut will not come. But we will have to see how these numbers come. What we hope that IIP should come in the positive territory, though not as low as was seen in the last numbers, 0.1%. So, if inflation dips, which we doubt, and IIP numbers go up, probably there could be some room. But we are not betting on a rate cut. Q: Have you changed your medium-term targets on the currency at all? For a lot of people the year end target was somewhere around 54-55 zone. What do you think we will get to by the time we step into the next year? Garg: It all very closely depends on how the reforms go on from here. If the government fails to deliver on the expectations this time around then there is no return for dollar-INR and the market will be very disappointed. But if they deliver on the expectations then the 54 is a critical level. If that breaks, we are looking at 52.50-52, definitely subject to the global factors being positive. With all the central banks easing, that doesn’t look like to be much of a problem now. Q: You said that you are expecting the yields to see some pressure. From this 8.2% level, do you have any kind of range for the 10-year? Gautam: The way we are seeing the supply side pressure in the market, if 8.21% level is taken then maybe the yields can inch up towards 8.25%. But we will have to see how it goes. Going forward, what happens on July 31, when RBI announces policy for CRR and other things, will certainly determine whether there will be some kind of rally or not.