See August trade deficit below $10 bn: StanChart

The Indian currency has hit a fresh all-time low against the dollar by opening at 62.35 and Ananth Narayan of Standard Chartered Bank believes quick fix solutions to the Indian "big bag of worms" will keep sentiment weak.

In an interview to CNBC-TV18, Narayan says: "The statement coming in from the ministry that they will restrict the current account deficit (CAD) to USD 70 billion, actually is a step in the right direction. That communication ought to be self embedded. But a lot depends upon how both these issues; current account deficit and the stuck infrastructure projects continue from here and that will determine that trajectory of all the asset classes," adds Narayan.

Additionally, Narayan expects the trade deficit for the month of August to be below USD 10 billion.

Below is the edited transcript of Narayan’s interview to CNBC-TV18.

Q: 62.30/USD, what is going on this morning in the rupee market?

A: The sentiment remains weak and at the same time volatile. A time like this is a time for reflection, a time to step back and take a calm look at things. The market is little tired of looking at quick fix solutions to what seems like a whole bunch of connected problems. However, it is important to focus on two structural issues; current account deficit and infrastructure growth and investments.

To be fair, there is progress happening on both the fronts, particularly on current account deficit. The statement coming in from the ministry that they will restrict the current account deficit (CAD) to USD 70 billion, actually is a step in the right direction. That communication ought to be self embedded. But a lot depends upon how both these issues — current account deficit and the stuck infrastructure projects continue from here and that will determine that trajectory of all the asset classes.

Q: What do you make of the soaring of bond yield to 9 percent, 8.96 percent this morning? Do you think it is because of the currency and the belief that the Reserve Bank of India (RBI) will need to be on tight mode for longer than people thought earlier?

A: It is. I think all the asset classes, equity markets, bond yields and the currency are inextricably intertwined at the moment. The sentiment on one is impacting the sentiment on the other. The fact that the RBI has embarked on monetary policy to address foreign exchange is creating a huge overhang on the bond markets and the auction, the cash management bills (CMBs) of the past couple of weeks haven’t helped. Hence, a lot of it is tied to the fate on the rupee. If rupee was to stabilise and if rupee was to find its own level, then given where growth is, given where core inflation is, bond market yields should subside from here.

Q: The only thing is that it is not happening. Even fixed income investors have been thinking that bond yields will cool down, it is a great entry point and the yield just keeps going higher and higher and now banks have also started increasing interest rates. Do you think we will have to live with this kind of elevated interest rates for some more months?

A: It does look that way. It does look tough for an immediate reversal to happen. Since August 2011, when the currency started to weaken, these two issues have remained; current account deficit and infrastructure growth and overall growth in general.

Unfortunately, we have not been able to address both these issues to the satisfaction of the market over the last two years. So, it is no longer a question of looking for quick fixes. It is a time to address these issues. We shouldn’t waste good crisis. I think it is a great time to address these two core issues, understand that these are the issues which impact all our asset classes. However, until such time that confidence comes in the market, we will lurch from one risk to the other and bond market yields will remain support till then.

Q: Any evidence of fresh foreign institutional investors (FIIs) selling in the bond market because the way the yields have moved of-late, has it been caused by or triggered off any kind of fresh FII selling in bonds, which seem to have subsided?

A: I think they have subsided from the levels of June and July. Even the data coming in from Sebi indicates that atleast for August, the numbers are not as bad as it did look in June and July.

The reality is the supply has been hitting us and in the past, bond yields were capped by the fact that we were having fresh buying from FII players; we had expectations of monetary policy easing at that point of time. It seems difficult to remember those times now and we had actual open market operations (OMO) purchases by the RBI.

All these three factors are now absent. So, any fresh supply, which comes in is getting increasingly difficult to find fresh buyers in the market. In all of this mess one must also remember that there are some signs that some of the core issues are getting resolved. I do not think the June and July trade deficit is a flash in the pan.

I think they are indications that things are improving. August trade deficit could be below USD 10 billion. So, it is a matter of getting the communication through. It is a matter of resolving issues on the infrastructure and the stuck project front and getting the communications through.

Q: The problem is not just the size of the current account deficit but the fact that nothing is coming in over the last three months to fund it. Whether it is USD 70 billion or USD 80 billion is a matter of debate but even if USD 80 billion comes to USD 70 billion or even USD 65 billion, you still need USD 5-6-7 billion, in fact more now given that the last three months have been wasted to fund it. Given bonds and equities both together are marginally net negative now for the last couple of months or more. Where is the money going to come from to fill this hole? Whether it is USD 65 billion or USD 80 billion?

A: Let me give you my take on this, in FY11, the balance of payments (BoP) was about USD 13 billion positive, FY12 it was USD 12 billion negative and in FY13, it was USD 2-3 billion positive. Our expectations even now for the balance of payment for FY14 are not large or alarming, despite the slowdown in capital inflows particularly on portfolio inflows. So, the reality is, if we think this is a short-term phenomenon, if we think this is a short-term mismatch of flows on a balance of payments basis then frankly, even the reserves that the RBI has should be enough to manage that.

The question is, are we resolving the structural issues of the CAD and the infrastructure investments. If we have the conviction that those issues are getting resolved then it’s only a question of mismatch. Eventually, the flow should come back into the country. It is not too difficult to remember the times when we were supposed to be the darling of the emerging markets (EMs), we can get back there again but the question is do we have the conviction that we can get back there again.