See volatile FX, bond mkts; rupee to gain today: Macquarie

Nizam Idris, head of EM FX Strategy, Macquarie sees the Indian currency strengthening on the back of central bank's measures to prevent currency market speculation.

Idris says the RBI's move sends a message to the market on its strong intention to curb the rupee weakness.

"Immediately, there is going to be volatility in both forex and bond markets. But I think the easiest thing to say atleast in the very short-term is that the currency is going to appreciate atleast today," adds Idris in an interview to CNBC-TV18.

The RBI, late on Monday, restricted banks’ access to money by putting a cap on how much they can borrow from it. The measures will be effective from July 17. The other measure undertaken by the RBI is selling bonds worth Rs 12,000 crore on July 18 to remove liquidity from the banks

Below is the edited transcript of Idris’ interview to CNBC-TV18.

Q: What kind of immediate impact do you expect to see both on the currency market and the Indian bond market this morning?

A: I think the immediate impact is quite clear. The rupee is going to strengthen from this, simply because it sends a message to the market that the Reserve Bank of India (RBI) is intent on curbing rupee weakness. However, it will be at the expense of tightening liquidity though it obviously depends on how the RBI is going to manage short-term liquidity as well following these measures. It is going to be pretty unclear. Immediately, there is going to be volatility in both the FX market and the bond market. But I think the easiest thing to say atleast in the very short-term is that the currency is going to appreciate atleast today.

Q: Would you be recalibrating your growth expectations now on the way down in the light of what has happened? Could this have ramifications for all asset classes in India, which are connected to growth?

A: To be very honest, we are surprised by the measures taken yesterday because one is really taking a risk at hurting growth further while trying to curb the currency from weakening at the same time. On Friday, the industrial production, manufacturing and mining contracts data that were released suggested that the economy is decelerating.

So our six percent growth forecast for this year is already risking to the downside and with this I think yes, I am likely to revise my growth forecast lower. But I am interested to see exactly what it means for the repo policy. It does not automatically mean that the repo rate would have to be hiked. But I think the chances of further cuts from now would be much lower.