See Re at 54-56/$; expect 25bps rate cut in Jan: StanChart

The rupee opened at 55.15 to the dollar in morning trade against its previous closing of 55.07 on Friday, moving around its three week low. Anant Narayan of Standard Chartered Bank however, is bullish on the Indian currency for the short term. However, the trade deficit still remains a cause of concern, he opined. According to him, headwinds in terms of political issues and the elections in 2014 along with issues about the fiscal deficit and ratings etc can again trigger a downside on the rupee.

But, Narayan believes the rupee will not breach the previous low of 57.30 to the dollar. "As a base case, I would expect dollar-rupee to remain in the range of 54 to 56," he explained. Here is the edited transcript of the interview on CNBC-TV18. Q: Looked like rupee stabilized for a while but, the weakness is back on the rupee. What kind of immediate downside targets are people looking at?
A: Despite all the news globally as well as locally we are seeing issues as far as the actual trade deficit is concerned. Two months of close to USD 20 billion of deficit means the flows are staked against the rupee.
In the short run though and the base case scenario we are still bullish on the rupee due to a combination of interest rate differentials, a more benign world in 2013 as compared to 2012, not withstanding the noise we are hearing on the fiscal cliff. The fact that commodity prices are holding up and not really going up from here and favourable for India and of course the prospect of interest rate cuts and a more pro-growth kind of strategy hopefully, will bring in flows into India. That remains the base case scenario.
However, the fact is that in the last year and half we have seen the rupee being as volatile as it is, we haven’t really addressed the core concern of trade deficit. That remains a worry for us. So it will unfortunately remain open to tail risks. Any headwinds in terms of political issues, the elections coming up in 2014, issues about the fiscal deficit and ratings etc can trigger a downside again on the rupee. But, frankly don't expect the previous low of 57.30 to be breached. As a base case I would expect dollar-rupee to remain in the range of 54 to 56. Q: There is quite a bit that is changing around in terms of the currency market worldwide including what is happening with yen, the way the euro is moving now. Is part of the problem global or you think it is squarely local? What is happening with our currency?
A: Fortunately or unfortunately, a lot of the positives are actually global. A lot of the unknowns are domestic. What has happened over the last six months or so is if you look at energy prices behaving themselves, the fact that global growth prospects seem to be better, the private sector data in the US has genuinely improved, even if the fiscal side remains a bit of a question mark.
Europe is stabilizing, the global energy equation seems to be going in favour of countries which import oil like us. All of that put together is giving a bit of a fillip to India. If you look at the actual FII flows which have come into the country this year, it is a record number of USD 23 billion plus in equity markets alone. So it is a huge positive for countries like us.
The concerns are unfortunately on the domestic front. First of all there is a question mark on the growth prospects per se. People are questioning the long-term India growth story given the nature of the micro economics, given the fact that infrastructure investments are really struggling at the moment and that takes a toll on not just the rupee but, the overall macro sentiment for the country as a whole.
Hence, if you look at 2013, as things stand right now, the favourable headwinds are coming from overseas or at least the reason for hope is coming from overseas. We are also hopeful that something turns on the domestic side, may be with a more pro-growth strategy, with more clearances from the infrastructure sector which can turn the tide for India as a whole and therefore the rupee as well. Q: There has been some on-again-off-again for the bond market, there was excitement around the Open Market Operations (OMO), then despondency because of the size. What is happening there and what kind of yield range do you think we are working with for the next couple of weeks?
A: Bond markets will continue to remain supported. The fact is that inflation data has surprised us on a positive side in the last couple of prints. We expect the actual inflation on March 2013 to be much lower than the Reserve Bank of India (RBI) target of 7.5 percent. In fact, we suspect it could be even lower than 7 percent given the trends in the rabi crop and the fact that producer pricing power doesn’t seem to be there.
All that augur well. We think rate cuts from the RBI should come through in the next year and it could be as much as 50 bps in the first quarter and 50 to 100 bps throughout the year. That should do well for the bond markets.
Also the fact is liquidity is tight right now, both on a structural as well as headline basis and the need for OMOs will probably continue which will again provide some support to the bond markets.
 
The risk of course is on the fiscal side. There are concerns that the government might struggle to reach its 5.3 percent target. Any slippage besides the rating implications also means higher supply of bonds into the market and that could put pressure.
But, honestly the market is reasonably well poised to absorb any small increase in the borrowing program. I expect the market to be in a range of about 8 to 8.20 percent with more on the downside on yields, rather than upside. As we come closer to the January policy, there may be a rally with the anticipation of a few rate cuts coming through. Q: What kind of odds is the money market working with in terms of a rate cut in January or conversely, are people expecting that to come only post budget which is sometime in March?
A: The market is moving towards a 25 bps rate cut in January. While there are some people hoping and praying for a 50 bps big bang and there are some people saying we wait till the budget like you said, the base case scenario will move towards a 25 bps rate cut in January, especially if the print for inflation in December continues to remain in a favourable trend.