Reforms kick start can lead Re below 53/USD: StanChart

In an interview to CNBC-TV18, Ananth Narayan, managing director, global markets, Standard Chartered Bank gives his views on the rupee. Narayan says he expects the rupee to continue in the 53-56/USD range.

He adds that the rupee could appreciate to levels below 53/USD if the governmnet implements its various reforms.  "The fact remains that our infrastructure investments which are extremely critical for macro economic prosperity of this country still remain caught up. So, if the Competition Commission of India (CCI) or the erstwhile National Investment Board (NIB) can kick start some of the infrastructure investments, then I genuinely would be calling for rupee lower than 53," he adds.

Also read: Rupee up 6 paise vs dollar in early trade

Below is the edited transcript of Narayan's interview to CNBC-TV18.

Q: It was a big move on Friday, being fed mostly by the domestic news or by something else?

A: I think it’s a combination. We have seen some robust news coming in from the global risk-on situation. I think the US private sector is looking particularly strong unlike the last year, when we saw a dip in exports. I think this augurs well for our own exports this year. So, there is growing confidence that this year exports should do better and we are seeing signs of that in software numbers coming out.

Domestically, things are looking or were looking little wobbly, like the current account deficit, fiscal deficit, etc. However, one cannot deny that the momentum has been strong in terms of tackling some of these issues whether it is the diesel price action, the whole set of reform steps taken or the pronouncements on General Anti Avoidance Rules (GAAR). People are seeing green shoots emerging on the domestic front as well.

I think rupee remains in 53 to 56 range. I would love to call it lower from here, but we need little more on the domestic front to warrant that kind of bullishness on a sustained basis. The fact remains that we still have the twin deficits to worry about. The fact remains that our infrastructure investments which are extremely critical for macro economic prosperity of this country still remain caught up. So, if the Competition Commission of India (CCI) or the erstwhile National Investment Board (NIB) can kick start some of the infrastructure investments then I genuinely would be calling for rupee lower than 53. However, at the moment it remains in 53-56 range.

Q: How did you read the move in the bond market because the yield which has been continuously slipping came back to 7.86. Do you think the market has priced in all the good news for next week from the Reserve Bank of India and now there could even be a knee jerk reaction on the way up if more than 25 bps is not delivered?

A: The bond market first was exuberant with the inflation data which came out and to some extent, the Index of Industrial Production (IIP) data. The reality is that we were expecting December inflation around 7.40 mark so 7.18 was a good print as far as rate possibility is concerned. Thereafter, ofcourse the RBI was quick to dull some of the enthusiasm with pointing out that the absolute level of inflation still remains high plus the consumer price index (CPI) came at 10.5 percent. So, the market still expects rate cut to come in at the point when the inflation print came out. There were growing expectations of 50 bps cut in January itself. The subsequent comments from RBI have watered the expectations down to 25 bps.

Going from here, yes, it could be tricky; the market is probably positioned long in the expectation of rapid rate cuts. One must also not forget that this month was good for the bond market in terms of the supply demand situation. We didn’t see too much of supply coming in, infact, it is a very light issuances month. February will see four weeks of continuous issuances, so it will be pretty heavy in terms of supply coming through. So, if we are left with only with 25 bps rate cut with continuing doubts from the RBI on whether more rate cuts are warranted, we could see a bit of selloff in the bond markets. At the moment though, I still remain reasonably bullish on bond markets.

Q: To rephrase that in terms of numbers, if we do get only 25 bps next week, do you see the yield inching closer to 7.75 or getting closer to 8 again?

A: Twenty-five bps with a continuation of the theme that we saw in the December policy i.e. indication of more rate cuts, I think it will pretty much remain in 7.80-7.85 range, maybe overshoot to 7.75, but we do not expect it to go below 7.75. If we see only 25 with ambiguity on future rate cuts, then we could see it going up to 7.90 or so because we will have a lot of supply coming in, in February. There will be doubts as we come closer to the Budget which is due end of February. So, we could see a bit of selloff coming on, but the overall scheme of things still remains in the longer term. It is still a fair call to stay long on bond. We should see 7.75 coming through eventually by March even if it doesn’t come through this round as yet.

Q: Any nervousness in the system though on diesel price increases and the collateral damage on inflation?

A: Between the two events, one would prefer to see these price hikes coming through even if it means temporary spike up in the inflation numbers because it augurs well for the fiscal going forward. Also, it clearly allows the pass-through of prices to go through and will hopefully bring down the overall demand in the system for these expensive energy bracket. So, the system would rather like these price hikes to go through than not. As far as inflation is concerned, given the print we saw in December, the market is now expecting a print in March end of well below 7 percent maybe even 6.8 percent and this is against the target which RBI had given of 7.5 percent. So, the market has reason to remain bullish on bonds given that the actual trajectory of inflation is well below the earlier RBI projections.