Yields to rise; rupee to hover in 58.40-60/$ for now: DBS

The Reserve Bank of India (RBI) has announced further measures to suck out liquidity and stabilise the falling rupee. Arvind Narayanan of DBS Bank sees the rupee trading in 58.40-60 per USD band in the short term.

According to the further measures the Central Bank has set the overall limit for borrowing under the daily liquidity adjustment facility (LAF) for each bank at 0.5 percent of deposits. The RBI has also instructed the banks to maintain 99 percent of their daily cash reserve ratio (CRR) requirement with the RBI, against the current 70 percent. Below is the verbatim transcript of his interview to CNBC-TV18 Q: What would your initial assessment be on how the rupee would react this morning? A: These measures have been fairly drastic. So, to my mind this limitedly have an impact of tightening the liquidity conditions and pushing up rates. Rates across the board will go up by at least 50-100 bps, especially in the short-term. Given that these measures will be valid in the short-term, expect short-term rates to go up higher. Q: Also now does this bring fresh fears into the market that perhaps this is not the last measure that we have seen from the RBI’s stable that there is more to come still? A: These measures have a very uncanny resemblance to what we saw probably in 1998 during the Southeast Asian crisis. So, the measures look fairly similar in terms of tightening liquidity and making interest rates more expensive. So, the message from the Central Bank is very clear. 1) The rate cuts are out of the window for now definitely. 2) Rate hikes are more in the offing and the resultant increases in rates do not curb the volatility in INR. I think we will see a lot of more measures happening on the CRR side or on the repo side more on the tightening. The message coming is very clear that we are willing to live with reduced volatility, reduced growth but the priority right now is to ensure that the currency volatility gets curtailed and that is the focus. Q: What about the yields, the rising yields will hurt a lot of the banks, bond and debt portfolios but in terms of a range for the yields, how are you expecting it to move later this morning? A: Definitely on the 10-year side, my sense is we should at least be about 20-25 bps higher. Short-term would be about easily between 50-60 bps to about 80 bps higher. However, eventually markets will play for interest rates going higher because I don’t see rate cuts happening immediately. These do not look to like short-term measures. I guess they will take time to stabilise the markets and these measures will be here for a while. So, I expect the longer-term rates to go up by about 20-25 bps. Q: What is the kind of trajectory that you are mapping now perhaps it is too uncertain to sort of chart a trajectory for the rupee? A: Dividing this question into let us say short-term and long-term. In the short-term clearly 60/USD looks to be the pain point so there would be measures at around 60/USD to protect the dollar/rupee. So, I would expect dollar per rupee to trade at about 58.40-58.50/USD kind of levels to 60 per USD thereabouts. However, in the medium-term, questions come back again. This is good, this will curb imports to a certain extent, this will make buying dollars more expensive. But at the end of the day, the policy still needs to curb current account deficit (CAD) on a sustainable basis. So measures, which can be taken to reduce imports on sustainable basis, how can you boost exports, can you attract foreign direct investment (FDI) long-term investments on a more sustainable basis? Remember, we have elections coming up next year so a lot of these policies would require courage. So in the medium-term, some of these factors would definitely pan out. It would be interesting to see what is in store in terms of these fundamental measures. Until then, we have to play around with some of these short-term measures to curb the dollar demand.