See rupee around 58-58.5/$; hawkish RBI tone likely: Nomura

Emphasising the overall weak macro economic data, Neeraj Gambhir of Nomura says the RBI is likely to be hawkish in its monetary policy due on June 17.

The index of industrial production (IIP) and consumer price index (CPI) that were released today, too pointed at the Indian economy’s slump. April’s IIP grew at a lower-than-expected 2 percent and May CPI stood at 9.31 percent in versus 9.39 percent in March. Cereals recorded the highest inflation of 16.29 percent in May.
This weak data, added with uncertainty on the Fed’s front in view of its tapering off the quantitative easing (QE) will make D Subbarao, RBI governor sound more hawkish than dovish, anticipates Gambhir.
The rupee too has added to the concerns as it hit a third consecutive record low by seeing levels of 58.70/USD.Gambhir sees further weakness in the currency and is expecting it to see a range of 58-58.50. Below is the edited transcript of Gambhir’s interview to CNBC-TV18. Q: First, the rupee, is this a temporary respite and therefore what kind of levels would you watch, another savage attack of risk-off can take the rupee to what levels do you think?
A: After yesterday’s huge volatility intraday, have just trying to find a new level. The new level is somewhere between 58 to 58.50/USD and that is the range that the market will trade in between. People are going to watch out for what happens to dollar, dollar Asia and dollar versus majors because these two markets are showing very different trends at this point in time.
The big theme is the overall flow of money into emerging markets or out of emerging markets. The market is going to watch out all these factors before deciding on what is the next step for rupee here.  Q: We have already seen 10-year go up to level of 7.34 post today’s economic data. If on July 17, we don’t get a rate cut as consensus is expecting then what is the likely movement on the 10-year yield according to you? How much is already priced in? Can we see further hardening of the yields?
A: On the monetary policy side, clearly the consensus is now moving towards no change in the policy rates and that is what the market is telling us. The focus is going to be a lot more on the kind of statements the governor comes up with. The previous policy was very clear in terms of them having very limited room in terms of further rate cuts.
Given what has happened in the rupee, inflation, we will still continue to see some bit of hawkish statements from the central bank and no policy cut. So, that could lead to some more sell-off in the bond market, I don’t rule it out. Even though over the longer-term we do believe that there is about 50 basis points of rate cut that the market should see over the rest of this financial year, the near-term story becomes a little bit muddled with this move in the currencies and the fact that the inflation data is not really working out the way many in the market had thought it should. Q: Does that make July cut a little more likely if the June cut were not to come or would that be even more data dependent and even more dependent on the volatilities in the global markets?
A: Over the last couple of weeks, a lot of the central banks actually moved away from easing policies to tightening policies. Indonesia saw a rate hike on Tuesday, Turkey has moved into defending its currency through the monetary policy.
In this scenario, any forward projection of the rates is highly dependent upon how the currencies behave and what is the kind of fund flow that we see in the global market. We are in a situation where, if the inflation does not play out, then the central bank is going to indicate that the policies’ forward path is going to be highly data dependent and highly dependent upon what happens to current account deficit, currency movements and more importantly the impact of currency movements on inflation and therefore the forward trajectory of the inflation. It does land us up in a little bit of uncertain environment at this point in time. Q: Do you see the possibility of the governor sounding a little more hawkish in the upcoming policy. Even previously he had spoken about limited headroom – do you think given all the developments there is a possibility that his commentary is going to be more hawkish than in the previous one?
A: If one looks at the statements that have come out from the RBI most notably from the governor himself over the last two-three weeks, they have been pretty cautious.
There was one statement where the RBI completely ruled out effectively any change in the policy rates in the near-term and then there was another policy about the impact of CAD. They are clearly looking at the risk to the macro economy at this point in time, they are clearly looking at the impact of the Fed tapering on the emerging market. All of these things would probably make it sound a little more hawkish than dovish.

Q: Do you think an NRI bond issuance at this juncture looks like a very good idea and will that bolster market sentiment – how bigger size will it have to be in terms of practicability and impact. The other question is on food security – do you think any announcement at this juncture can seriously set the cat among the pigeons with respect to the currency?
A: It is a bit early for NRI bond. We still need to see what form and fashion the government is thinking about this particular bond and whether it is INR denominated bond or whether it is foreign currency denominated bond. I do believe that the overall macro story around India is still quite intact and there is reasonably good level of interest especially among the Indian resident offshore to buy Indian paper. A well structured Indian bond would definitely find interest and specially given the recent yield sell-off the attractiveness is probably increased a little bit more.
In terms of size, it depends upon the structure, it depends upon the currency but I do feel that if such a bond has to make an impact into the market it has to be a reasonably large size, it can’t be few billion dollars. We need to look at USD 10-15 billion kind of a size to make any impact on the currency.