Global risk-on, portfolio inflows supporting Re: Stanchart

The India rupee is on a strong trajectory. The rupee opened at 52.96 per dollar on Wednesday and firmed up further to 52.90. However, it trimmed initial gains and was quoted at 53.03 per dollar later. The rupee has been moved between 52.90 and 53.07 per dollar during the morning deals.

Sharing his reading and outlook on the Indian currency, Ananth Narayan of  Standard Chartered Bank said, global risk-on sentiment and strong portfolio inflows are leading to this buoyancy in the rupee. "In the short-term, there are a lot of positives in terms of flows, which is helping to negate the rather large current account deficit (CAD)," he said in an interview to CNBC-TV18. However, he doesn’t see long-term reversal in rupee’s movement anytime soon. Below is the edited transcript of Ananth Narayan’s interview with CNBC-TV18. Q: What exactly is helping the buoyancy in the rupee besides the capital inflows do you think it is the global currency space, which is helping us? And do you think these levels of 53 are sustainable? A: Actually, it is a combination of factors really. The global risk-on sentiment helps. We have also seen some very strong inflows and short-term positives continue. We have seen strong portfolio inflows. There are prospects of more with the disinvestments which are planned between now and March 31, plus there are sporadic foreign direct investment (FDI), which we keep hearing about in various sectors, which are coming through. One must also remember that the Reserve Bank of India (RBI) recently increased the limits for the debt on both the government and the corporate bonds. So that should see some inflows coming in between now and the end of the fiscal as well. In the short-term there are a lot of positives in terms of flows, which obviously is helping negate the rather large current account deficit (CAD) that we have. A medium-term positive, which could accrue over this next year is our exports should look up with the global growth and the United States (US) private sector looking a lot better and the fact that despite the move in Yen and bond etc. rupee still remains largely depreciated over the last 3-4 years against the Asian peers, our exports should go up. But I don’t think the confidence for long-term reversal in the rupee’s fortune is there as yet. I personally would want to see actual progress on infrastructure growth and investments in India before I turn a true long-term bull on the rupee. Q: Where is the Euro headed? Is this strength here to stay or 1.36 that’s it and we are going to see the trajectory move, the pendulum swings once again towards 1.30 mark. I am asking you in terms of a quarter? A: I believe this risk-on globally has legs and my confidence stems largely from the US private sector. They are sitting on piles of cash. The real estate prices there are low, there seems to be some legs to this entire energy and Shale gas story and labour is available. In many ways, we are seeing the US emerge as the new manufacturing hub as and when investments start to pick up again globally. It won’t go into emerging market (EM), it would rather go into the US. On the strength of that, there is a every possibility that the global risk-on remains, which should auger well for Euro and for all risk-on indicators. There are risks, Europe itself is still not out of the woods, neither is China completely. We talk about Cyprus and few peripheral countries in the Europe even now and for all the bullishness in the US private sector we can’t rule out the fact or the possibility that US politicians might snatch defeat from the jaws of victory by doing something silly between now and March. All those risks are there, but globally, the US private sector has legs to it and that should keep the risk-on sentiment in all sectors. Q: So, it is what 1.32-1.36, is there any bracket you are looking at for the Euro-Dollar? A: Euro will remain supported at about 1.32 or so. For the quarter, it should head towards 1.38 or so given that the risk-on sentiment remains. The risk though is as we come closer to political deadlines in the US, we could see some nervousness emerging in the overall sentiment. But broadly, the risk-on remains. _PAGEBREAK_ Q: What is your trajectory for the rupee in 2013 as a whole because it is expected to be a better year of macros in terms of say the fiscal deficit atleast for us in FY14. In that sense and in that context do you think that the rupee could possibly be better off in 2013 and never possibly test those 57 levels again? A: I wish I could clearly give a call out here, but a lot of it depends on the policy measures taken especially on the government’s front. Reality is there are short-term positives. There are Foreign Institutional Investor (FII) portfolio flows, there is FDI coming through and there is a global risk-on sentiment and I think exports should do better this is year than it did last year. Let’s not forget the factor however, that we still have a tremendous CAD problem even if exports were to improve this year we still have to run on this treadmill and keep getting capital flows just to stay in the same place. I would as I said really turn positive for India macro as well as for the rupee. If I actually saw some of the microeconomic problems getting sorted out i.e. the investments in infrastructure projects actually taking off, the ports, the roads, the highways, the freight corridors taking off – if that was to happen and irrespective of where gross domestic product (GDP) actually settles we would have the confidence to say that India is on the right path, we would continue to attract high-quality inflows and that would tackle long-term inflation etc. problems, be on the right microeconomic path for us to go bullish on the rupee. At the moment, the rupee is also being helped by the fact that not many people expected it to come to the lower end of the 53-56 band. So, there has been skepticism about this entire move throughout. That by itself could help push the pendulum a little to the other side below 53 to 52.5 or so, but to get confidence on the long-term prospects we still need to see policy measures translating into the micro level where infra projects take off. Q: Finally, a question on the bond markets, irrespective of what the Finance Minister (FM) will announce and how credibly the markets will take it, there is certain arithmetic as to the demand and supply for bonds from now to 31st March. Given that how will you look at the yield range? A: I am mildly positive on bonds. There are a couple of auctions coming through between now and the end of this month. But as we come closer to the budget the FM has gone out on a limb and promised us 5.3% for the last year, fiscal deficit and 4.8 for the next year - that will be positive, plus given liquidity should tighten in March. We should see open market operation (OMOs) coming through that should be supportive for bonds. We shouldn’t see too much of supply coming in March given the government cash position remains robust plus the FII demand for the bonds comes through once the new limit opens up. I am looking for the 10 year bond to come down to 7.75% or so by March and hopefully take us into a good trajectory into the next year as well. Q: In 2013 as a whole is there any room in terms of an aggressive cut in CRR and what level do you think that the RBI possibly be comfortable with also? A: A lot of the CRR cuts really didn’t make a big difference to the bond markets besides having a vicarious issue of reducing the size of the OMOs. The reality is, the headline optical short fall in liquidity has remained pretty high, it’s still is about Rs 900 billion on an overnight basis despite all these CRR cuts. So, it hasn’t really translated into excessive liquidity in the system as yet. if one was to call for a 7.5 percent on 10 year bond as some people are, one would need obviously a lot more of convincing rate cuts to come through and some conviction about the path of the fiscal deficit going forward, while I am obviously interested in rate cuts as a bond market player, I am not really sure if that’s the right thing for the country and for the macro. We have had this endless debate about growth versus inflation, which I have lost a lot of hair on and the country has progressed on neither. But I wish we would go into more of making it an infrastructure growth and inflation control together kind of a paradigm rather than worrying about growth versus inflation.