Higher exports to ease CAD; 25 bps repo hike likely: HSBC

Manish Wadhawan, MD & HD-Interest Rates, HSBC says the home currency had had a good run in the previous month but its future course will be dependent on current account deficit figure, RBI steps and inflows from FCNR(B) accounts.  He also said there is a 50 percent chance that the country's central bank will resort to a 25 basis point hike by the end of this calendar year.

Speaking on CAD, Wadhawan said one might be positively surprised by export numbers for the months of July to September. Below is the verbatim transcript of his interview on CNBC-TV18 Q: It has been relatively good month for the currency market as well which is where people are probably heaving a bigger sigh of relief but how do you think October is going to shape up in terms of these global headwinds as also what has happened with the macro data? A: On the macro data front, the Q1 CAD was quite an expected line though there were fears that as a percentage of gross domestic product (GDP) it could be a bit higher. However, looking forward things actually could turn out to be a bit positive on current account. The way export numbers are available for the first two months of July to September quarter and if we extrapolate further, we might be positively surprised on the current account deficit numbers which could be definitely between USD 5-10 billion and that translates into something like between 2-2.5 percent of GDP. So, on that front, one could see some positive news. However, the caveat is that because of what Reserve Bank of India (RBI) steps have been taken and they are adding up liabilities now because they have taken the oil demand from the market. We need to see how it pans out. Finally, the most important number to be watched is how much of flows come-in on account of Foreign Currency Non Resident (Bank) or FCNR(B) deposits and the banking capital. A mix of all these three things would chart a territory for the rupee for the next quarter. We feel that at this point of time for the next quarter there is no need to get too over excited about rupee but the worst also is behind us. So, it is going to be quite a balanced kind of a move in the next quarter. Q: Some houses are actually now penciling in 50 basis points in terms of a repo rate hike within this calendar year itself from the RBI – is the bond market primed for that kind of rate action and what do you think that might do to the benchmark yield? A: I have a view that there is a possibility of normalisation of rates in this quarter itself once the dust settles on the forex side, which seems quite likely. I think there is a 50 percent probability of a 25 bps hike in repo rate and then normalisation of the marginal standing facility (MSF) to correspondingly to 8.75 that is quite possible. However, the rest 50 percent is that there may not be any further repo rate hike. I don’t think that we are going to see beyond a 25 bps hike in this year. The 10-year yield we expect to hover between 8.5-8.75 percent for the time being because RBI has already issued a statement on September 30 that they would be balancing out on liquidity with open market operations (OMOs) etc also. It is a balancing factor. Once the full normalization happens, what I mean is that the repo rate becomes the overnight rate and the normalcy is restored to markets, one might actually see some drift down in yields further but till that materialises the benchmark yield are going to hover between 8.5 to 8.75 for some more time to come till policy.