See rupee in 58-60/$ range, high yields for now: StanChart

Ananth Narayan, Standard Chartered Bank expects the 10-year bond yields to be in the range of 8-8.30 percent for now after the Reserve Bank of India move to tighten liquidity. He believes the RBI's decision is a strong signal to defend the rupee and has taken the market by surprise.

"While rupee has not recovered as much as one would have expected, I would still think we would remain in a 58-60/USD range for now if not 57-60/USD," he says in an interview to CNBC-TV18. He believes some amount of intervention from the RBI right now will strengthen the rupee in the short run.

Meanwhile, Narayan believes there is no need for a rate hike right now, after the RBI's move to increase marginal standing facility (MSF) rate to 10.25 percent which, according to him, is pretty much a rate hike already. Below is the verbatim transcript of Ananth Narayan's interview on CNBC-TV18 Q: Crazy day for the market, how has the yield opened up before anything else?
A: 10-year yield opened at around 8.15 percent, it is trading at 8.06 percent right now so it is a sharp up move in yields given the action from the Reserve Bank of India (RBI) overnight. Q: Is the system a little stunned this morning, have things actually come as a bit of a surprise for all markets?
A: There were some whispers about monetary policy being the first line of defense for Fx doing the rounds. The actual action coming through at the start of the week is a surprise and the reaction that you have seen overnight clearly indicates the fact that the market has been taken by surprise. Q: Do you expect a lot of push and pull in trade today for the forex market because it opened at 59.20/USD but the rupee has actually gone back to 59.50 in the course of the last two-three minutes. Is there hectic adjustment happening right now?
A: I would break this into two parts. The first part is in terms of action and in terms of actually giving a signal to the market, it is pretty decisive. We can argue as to whether this was the best policy course available to the RBI or not to communicate that intent.
However, as a matter of intent coming on the heels of what they did with the exchange in the Futures, this is an extremely strong signal. To that extent, while rupee has not recovered as much as one would have expected, I would still think we would remain in a 58-60/USD range for now if not 57.60/USD. Some amount of intervention from the RBI right now will find the rupee strengthening in the short run. So first from a communication and intent signal situation, it is a pretty positive move.
Secondly, how long will this go on and what really happens in the medium term? It is a fine line between managing the short end and the short term and ensuring that this doesn’t endanger growth prospects or the equity market sentiment in the medium to long run. The markets can sustain a short-term period of liquidity tightness as long as there is light at the end of the tunnel. However, as we have seen in other countries like Brazil and Indonesia and even in China, if the equity markets take badly to this, then there is a risk that we have other problems to grapple with.
_PAGEBREAK_ Q: Several downgrades of gross domestic product (GDP) have happened already this morning and 8 percent plus bond yield is not exactly growth supportive. Are we making sacrifices that may be too big over the medium term to protect the rupee?
A: There were a lot of tough choices for the regulators and the authorities to make. So, do you let the rupee depreciate uncontrollably or do you invest some amount of either action or reserves in bringing some stability to the markets? If you do bring in stability, given that the signal has now happened and some stability hopefully comes in the markets and we reel from what the actions of the RBI are, some amount of action happens in controlling the current account deficit (CAD), the core issue.
To that extent, while some amount of progress has already happened in June and hopefully continues in July, it is possible for the RBI and the government to target CAD just as they targeted the fiscal deficit a few months ago.
This time last year, we were talking about 6 percent fiscal deficit and then there was a war on the fiscal deficit bringing it down to 5.2 and 4.9 and eventually for the next year at 4.8 percent. Likewise, it is possible to target the CAD through a variety of measures just like the gold. If that happens in the interim, may be we come out of this unscathed, may be the market stabilises, maybe we get some debt flows to sustain us in the interim and growth in equity markets aren’t impacted in the medium term. Q: According to talks this morning, in the next RBI meet, the governor will choose to move either on repo or on cash reserve ratio (CRR) to align what has happened with market rates. Is the bond market now aware of the possibility that there could be a rate hike in the next meet?
A: I don't think we require a rate hike right now, what we got last night is pretty much a rate hike already. It looks like we will be system short for about Rs 1.25 trillion pretty shortly which means a substantial portion of the overnight market will have to hit that marginal standing facility (MSF) rate of 10.25 percent. So, a lot of short-term rates whether it is CP’s, CD’s, treasury bills, medium or short-term deposit will all move and gravitate towards those kind of rates. So I won't be surprised if CP rates go above 9 percent in the short-term.
A rate hike has effectively happened with what have been the steps overnight. So, I don't think we need to follow that up with a formal repo rate hike as such. Q: What kind of band do you see the bond yield in right now?
A: It will be tough for it to come below 8 percent and one must also look at the shape of the curve. There will be a huge amount of flattening that will happen, shortened rates will tend to move up a lot more than the longer end rates. The market will be conscious of the fact that India is in a soft spot as far as growth is concerned.
Inflation despite crude is not really a worry as such. So, the market will be playing for this to be a short-term phenomenon and therefore, factor in much higher rates in the one-three months, six months, one year buckets. 10-year rates will move up in sympathy but I suspect it will remain in 8-8.30 kind of range for now at least.