Rupee may hold for now; repo rate hike seen: StanChart

The Reserve Bank’s decision on reducing marginal standing facility (MSF) rates, thereby easing liquidity, was a surprise move, says Ananth Narayan of Standard Chartered.

Speaking to CNBC-TV18, Narayan says the RBI’s move takes away dollar demand from oil companies, but the longer-term worries on 10-year bond yields still remain.
On his expectation from the central bank, Narayan says one cannot count on too much policy reforms given the fact that elections are around the corner. He further expects the rupee to hold steady at the current levels. Below is the edited transcript of Narayan’s interview to CNBC-TV18. Q: 8.5 on the 10-year, will there be more and how much of a move in the short-term paper you think?
A: The timing of yesterday’s move was a positive surprise plus this comes in the aftermath of an open market operation (OMO) where the Reserve Bank of India (RBI) mopped up 10,000 crore of bonds. So, the momentum is going to be strong. There will be a steeping bias given that the immediate impact is on the short end of the curve as we have already seen the 10-year bond going down to 8.5 percent. It could go down lower to 8.40-8.35 or so. For the short-term, two-three year paper will probably come to the 8.10-8.15 range.
However, concerns on the longer-term will remain and the fact is that fiscal deficit is going to be a bit of a question mark going into the next year and we are running into elections. There are concerns about this year added with the food security bill and uncertain election outcomes which could impact the fiscal again.
Hence, the concerns on the longer-term will probably remain for while. So, short run, positive momentum going into the policy. In the longer-term, we will remain cautious and wait for more directions both from external as well as from domestic sources. Q: What have you made of the reaction in the currency market and where you see the rupee headed?
A: The relaxation done by the RBI since the last policy and yesterday’s move indicates that the RBI is comfortable with what is happening on the currency market. One must remember that the steps that the RBI has taken, principally taking away the dollar demand from oil companies and schemes such as the foreign currency non-resident (FCNR) scheme are still in progress. This is giving a lot of support to the rupee over a period of time which is very similar to the bond markets.
At the moment, things look good, there is a lot of support coming in, the external environment remains reasonably positive, not withstanding the uncertainty. Q: What is the next from the RBI? Do we have to wait till October 29 but considering the way they are shooting from the hip you would expect some easing steps even before October 29?
A: I think Rajan is sticking to the script. He did mention that he is going to bring down the marginal standing facility (MSF) for a period of time and narrow the gap between the repo rate and the MSF.
I wouldn’t be surprised if we see another small repo rate hike in the credit policy coming up at the end of the month accompanied by reduction again in the MSF rate. The reality remains that in the long run and the medium run, the fiscal side remains a concern. One cannot wish away that particular problem and the fact also remains that from Fx perspective, the micro economic health is not looking too good. Growth is slow, corporate are under leverage and under stress. So, the risks haven’t gone away and particularly with elections round the corner, one cannot expect too much in terms of policy moves.
This is a time to build the trenches and to begin in case we have another episode early next year or middle of next year. So, I do not expect rupee to run away, I think 60/USD would hold and this is a good time to be cautious and take advantage of the currency situation.