Yields will be under stress over rupee instability: HDFC Bk

The possibility of the United States attacking Syria over alleged use of mass chemical weapons will put pressure on emerging markets (EM) and the Indian rupee, believes Ajay Marwaha, head-trading treasury, HDFC Bank.

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Speaking to CNBC-TV18, Marhawa explains that this pressure has reduced the realisations on the government’s borrowings by 10 percent.
“Even if it physically goes through and borrows today, most of the bonds are priced at below Rs 10. So, that basically means that for every Rs 100 of paper that it issues, the government is only getting Rs 90. That is going to pick up the borrowing programme by another Rs 50,000-60,000 crore,” he explains.
This additional cost is likely to add pressure on the bond yields until and unless there is some kind of an inflow, he adds. Below is the edited transcript of Marwaha’s interview to CNBC-TV18. Q: The bigger concern is with the 10-year bond above 9 percent, what is the market factoring in, is it the higher inflation because of crude and rupee or is it actually a fear that the government will borrow more than what was budgeted?
A: It is both of those. There is a clear risk that the rupee could catapult from here. We have a situation where in a risk-off situation, like we have seen thanks to the war, there is a threat to emerging market currencies. But then, in a risk-on situation, even if the war fears were to deescalate, the risk constitution is more towards capital flight to the US and the EU.
Hence, in both cases, the EM is under threat and if that is the case, the rupee is going to continue to remain a threat from overseas. Given the initial set of reactions of the government and the Reserve Bank of India (RBI), the market is obviously concerned that the interest rates could be jacked up further because we are seeing levels now which are 10 percent south of the levels that existed when the first round of action came from the RBI. That is one concern the market has got.
The other concern is that the government is realising approximately 10 percent less on its borrowing. Even if it physically goes through and borrows today, most of the bonds are priced at below Rs 10. So, that basically means that for every Rs 100 of paper that it issues, the government is only getting Rs 90. That is going to pick up the borrowing programme by another Rs 50,000-60,000 crore. All of these are concerns and at this point of time, what levels it could all go to is a figment of everybody’s imagination.

Check latest rupee-dollar rate Here Q: To take that point forward, Rs 5.7 lakh crore was the borrowing target, how much do you think it could spike by in absolute terms?
A: In simple mathematical terms, if they were to continue to borrow at approximately Rs 90-92 to the Rs 100, then we are going to see the number go upto about Rs 625,000 crore at the minimum.
This basically means a Rs 40,000-50,000 crore increase. So, in a market where even absorbing existing supply is becoming an issue given, the kind of environment we have seen and given the fact that cost of liquidity is 10.25 and most of the curves are tending to converge there, it is going to be a bigger problem.
We are going to see pressure on bond yields and at this point in time, the only thing that we can consider which will stop this or even stem this temporarily is some kind of a bulk inflow which we haven’t seen. Q: What is the state of the market now? Is it that you are seeing voluminous buying of dollars, were foreigners among the buyers today or is the market falling or the rupee falling on thin volumes because people are not selling?
A: Volumes have been thin over the course of this entire week. This entire move not only in the rupee but in the bond market has been on very small volume. The market is quite frankly in a partial state of panic, dollar buying is emerging from regular sources. We haven’t seen any dramatic buying from FIIs.
If one looks at the outflow figures from equity, they are correspondingly positive inflows on debt. So, it is not as if we have seen any massive amount of capitals like which is the other thing that is scary. Given these levels on equity, given the developments outside of India, if there is any capital flight, we will have an issue.