DBS blames INR fall on US data, SBI says yield rise to stop

Arvind Narayanan, ED and head of Sales, Treasury & Markets, DBS Bank believes the rupee may see some respite in the near-term though the trend for the Indian currency remains bearish for now.

Speaking to CNBC-TV18, he says the main reason for rupee's sharp crash to 64 against the dollar can be attributed to the US bond yields, which are at a healthy 3 percent, signalling a recovery in that economy. “If you have strong data coming from the US, emerging markets and especially those with current account deficits like India would be in a spot of bother,” he adds.
A Krishna Kumar, MD, State Bank of India also expressed his view on the fall in the rupee mentioning that the recent bond yield move is temporary.  The current bond yields are hovering around 9.5 percent. It is assumed that banks will take a hit due to the sharp spike in yields but Kumar says one will have to wait until September 30 to determine the exact amount of treasury losses.  Below is the verbatim transcript of their discussion on CNBC-TV18 Q: Will rupee at 64/USD sustain in the near term? Narayanan: I think so because 64/USD has happened in too quickly. In the last couple of sessions, we have seen so much weakness in the rupee that logically the market would take a pause, think about where the rupee is headed. There seems to be a possibility that we might see a short-term correction in the dollar-rupee. But make no mistake the trend looks upwards in the short-term now. Q: We know the medium-term reasons for the current account deficit on why the rupee is on the current trajectory but what has let to this extremely sharp spiky nature of the fall in the last couple of days? Narayanan: The culprit is the sharp spike in the US yields. If you see 10-year US yields are very close to 3 percent and that makes it clear that the recovery in the US is strong, we have the Federal Open Market Committee (FOMC) minutes for July coming out tomorrow. So, we will also get sense of where the Fed stands with respect to the US quantitative easing (QE) tapering.
By and large the market consensus or at least the majority of the street feels that QE tapering will start in September, about 10 billion out of the 85 billion odd would get tapered down.
As we move towards December, this number would only increase. So, if you have strong data coming from the US, if you have the US yields going up, emerging markets and especially those with current account deficits like India would be in a spot of bother. We need to do a lot of work domestically to make sure that we do not bear the entire brunt of this pain.

_PAGEBREAK_ Q: What is going on with the bond yields? Nearly 9.45- 9.50 percent this morning is another scary story. What would you attribute this kind of a spike to? Narayanan: There is a concern about where the interest rates are headed, given the volatility in the currency there is possibly no expectation of any easing happening in the short-term. Also, people are wary to buy bonds because by and large most of the positions have blade over the last couple of months, most banks are sitting on huge mark-to-market losses and that would come out in the next results.
Bond are being bought only when it is absolutely necessary from statutory liquidity ratio (SLR) perspective, when it is not needed probably do not buy and all the indications from the government are in the short-term rates are continuing to remain high. This doesn’t look to be a temporary short-term move any more. So, rate hikes and rate upmove seems to be there for a while and there would be mayhem in the bond markets. Q: This move to nearly 9.5 percent has taken you a bit by surprise. Do you think bankers would be very concerned and surprised with the very sharp spike in yields that we have seen in the last three days? Kumar: Move in the yields in the bond market has come all of a sudden but this is temporary because ultimately we have to look at the quarter ending before we find out whether there is going to be loss in this portfolio. We have to wait for quarter ending and see what the yields are finally on September 30 before we make any conclusions on this. Q: On current reckoning, what would be the losses, academic that the question might be? Kumar: I do not have the exact number with me now. In the analyst meeting, last week we spoke of about Rs 1,000-2,000 crore, but I do not know the exact number at present. Q: Between last week and this week yields have hardened about another full percentage point, does that makes any difference to the figure? Kumar: I do not have the number with me. Yes, there would be some negative on this particular movement of the bond yield but we have to look ultimately at the quarter ending rather than at the movements in the market on an intra quarter basis. Q: With regards to the Reserve Bank of India’s (RBI) move a few weeks back, most bankers including State Bank of India thought it was just a temporary move because of the rupee and would get unwound very quickly. The way the bond yields have moved, does that suggest the move was temporary? Kumar: It depends on how you define temporary. Would you call temporary just a week or ten days or just one day? We need to look at little longer timeframe when you talk of temporary maybe a week-15 days would be a better definition of the word ‘temporary’ rather than look at a daily movement. Q: It has been many more than 15 days since we last spoke about that move being temporary and the rupee has gone to 64/USD, not gone to 57/USD. So, will you retract your expectation that the RBI moves that were taken to reign in the dollar are temporary in nature? Kumar: I still think these are just reactions that are immediate in the market because of the fact that there maybe some sort of speculative activity going on. However, as the month goes on and as we approach the quarter ending, there will be much more respectability to this figures. Q: Are you suggesting that the bond yield spike is because of a speculative attack? Kumar: That is just my opinion but if you ask me numbers, I would not be able to give you the numbers.

_PAGEBREAK_ Q: What do you think is the primary reason why the bond yield has gone up to 9.5 percent, nearly? Narayanan: The RBI started off with a clear intent that they want to hike interest rates to reduce volatility in the currency. It started out as a temporary measure but the rupee has only weakened from the time these measures have started and also these hikes are inline with what we are seeing in most emerging markets across the world.
Given the scenario and it is not only an India scenario and it is not because of domestic factors alone. It is just what is happening globally and what is playing out in the US market. Countries like India would have to hike interest rates to reign in inflation, to ensure that outflows are limited and they are able to attract inflows.
I am not sure that this rate hike or the so-called tightening on rates, hardening on rates would come back immediately. There could be profit taking, there could be corrections but by and large rates look to be on the higher side.

Q: It is not just market linked rates but actual rates from banks; base rates, deposit rates have also started hardening. Do you worry that many of your clients, who are already reeling under balance sheet pressure, may not be able to service the higher interest cost this year? Kumar: It is a possible scenario that as the interest cost goes up there would be further stress specially on the large corporate side, the mid corporate side of the interest rates increase tremendously. However, as far as we are concerned, at present we are not looking at changing any of the rates we have. I do not believe that there is a necessity to tinker with the rates in any form. Q: Do you lend to corporate like Lanco, GVK, GMR, Adani Group, do you worry that some of these balance sheets are looking a bit scary? Kumar: The first few companies; we have a very minor portion. It’s only in Adani that we have a fairly sizeable exposure but these groups in any case have the intrinsic strength to rebound from any temporary setbacks in the economic situation. So, I do not have a great worry that these companies would go under. They would certainly have some issues in the near term but they will be able to weather the storm. Q: In the near term what do you expect, a pullback in the rupee? What kind of levels, just because of profit taking maybe because of the sharp nature of the fall? Narayanan: Just because of profit taking and not due to any change in trend, dollar-rupee can easily come back by a rupee or a rupee and a half. So, 62.5/USD to 62.80/USD is not something which is very far off. We saw that level few days back but dollar-rupee will broadly play in this range wherein this is going to be more than 60/USD for a while.
It is a new normal on the dollar rupee. However, 65/USD is definitely a possibility but it is not fair to target a level because it depends a lot on how the US market shapeup, a lot of it is not in our control. I also anticipate two-three good announcements to come from the government and I do not mean a flurry of small time announcements.
I am looking for two-three big measures that can get in USD 5 billion-USD 10 billion on an immediate basis and can also play a role on the sentiment side. We can see some dollar-rupee coming in and that coupled of announcements can lead to short-term pullback on the dollar-rupee.