MAT overhang on mkt; rupee may retest 63.90-64/$: Nomura

A: I think it is a bunch of things. Obviously the fact that equities have been quite weak is showing up on the currency. But also over the last few weeks we have seen renewed strength in the crude oil prices. We have seen a fairly weak trade deficit numbers for the last month and the fact that we have seen a renewed appreciation in dollar versus major currencies. So, all of these things are kind of combining together to give us the kind of weakness in rupee that we have been seeing and it seems like we have broken through a consolidation move. The sixty-three break on dollar-rupee is a significant break, so that is something which we need to watch out for.

Anuj: Are traders attributing this recent foreign institutional investor (FII) taxation issue as maybe one of the concerns which could be weighing on the currency?

A: It is certainly weighing on the markets because minimum alternate tax (MAT) is a significant issue for the market. It is something which could have a meaningful impact on the FII investors. So, clearly this is not something which has gone down very well. So, we will have to see how this issue resolves but yes, certainly there is a bit of a overhang of that issue currently in the FII investment inflows.

Ekta: Has there been any intervention from the Reserve Bank of India (RBI) at certain levels in order to manage the rupee?

A: So, while it is not very obvious at what point of time Reserve Bank of India intervenes, but if you go by the market talk and you look at the data, it does feel like the Reserve Bank’s response has been quite asymmetrical to the rupee moves. They have been quite an aggressive buyers of dollars during the periods when rupee has sort of tended to appreciate but they have taken a bit of a hands-off approach to the rupee as the depreciation sort of sets in or rupee tends to start behaving weak. And that asymmetrical response is a function of two things. One there is a desire to see currency not over value and second the fact that they are still looking to build reserves. So, clearly they continue to accumulate reserves as and when they see the opportunity to do that. Having said that, there has been some talk of some intervention of Reserve Bank at slightly higher levels to try and slow down the pace of the currency moves and also to maybe reduce a bit of volatility but I do not think a significant intervention to cap the upside is yet to be seen in the market

Anuj: We did breach 63. We have of course recovered from that. But, how important is that mark from here on in the background of weak equity markets?

A: I think 63 was a fairly important level because rupee has been consolidating around this level for a while now. So, a break of 63 on the upside is obviously quite significant and it does signify that if you continue to see weakness in markets and if you continue to see the other market trends, whether it is equities or whether it is crude oil, you could potentially see a retest of 64 level. So, 64 to my mind or there-around, say 63.9-64 is the level where you could potentially, is a very significant level, so you could potentially see a retest of that level.

Ekta: So what is the near term range you would be working with on rupee and if you could specify the timeline as well?

A: The very near-term range for the next month or so, we could probably see somewhere between 62.75-63.90 or 64. It is a bit wider range but I do feel like the low volatility period in rupee that we had been seeing in the last few weeks is probably given way to some bit of volatility here. So, we could see somewhat large moves in INR and we could, if the weakness in equity markets persists and if the strength of the crude oil persists we could potentially see a retest of 64 as I said earlier.

Anuj: Even before this equity market weakness the latest trigger was the March trade deficit data. How important was that and is there a concern on further weakening in trade deficit in the coming months that could be weigh on the currency?

A: So clearly we are continuing to see weak performance in exports. We have seen some uptake in the imports, generic imports as well as the gold imports. So, clearly the trend of consolidation in trade data and consolidation on current accounts seems to have given away. It is just one data point but we will have to see how this pans out over the next few months. Historically March has been a month of good exports, good flows and probably one of the better months as far as the cyclicity in the trade deficit numbers is concerned. So it is a little bit concerning that you have seen a wider trade deficit in a month which is supposed to be a better month. We will have to see how the next two or three months pan out but it does feel like that we could see some widening of current account deficit from the lows that we have seen in the months of January and February.

Ekta: For the bond markets then, what is the range and maybe even near-term cue for the 10-year?

A: Bonds are in a very narrow range right now We are currently trading at around 7.79, 7.8 thereabouts. The market is waiting for a new 10-year bond issuance to happen which could then decide the range for the 10-year bond. If a new 10-year bond was to happen today, I would think that the 10-year yield could reset down to about 7.60-7.65. We have a new 8-year bond being auctioned this week. We will have to see how that auction goes. But, we could, depending upon when the new 10-year comes in, we could be between the 7.60-7.80 range.

Anuj: And what about the Brent Crude prices because they have also inched up quite a bit. How important would that be?

A: Fairly closely. I do not think yet it is a cause of concern. In any case, the broad market range was USD 40-60 maybe USD 40-70 and we are still, we are probably at the higher end of that range but if it continues to strengthen and we break out of let us say USD 65 or towards USD 70 level, it will be something that the market will be quite concerned about, specially from an Indian economy stand-point because we are a heavy crude importing country and it has a significant impact on our current account and it also has a significant impact on inflation.

Ekta: And lastly, what's the trend of FII flows in the debt markets, especially corporate?

A: We continue to see interest though not as big as before. But if the currency starts weakening we could see some slow down in the FII investments. But otherwise from a fundamental stand-point given the yield differentials, given the expected path of monetary policy, it still continues to be very attractive market for investors. The biggest issue still is that you only have corporate bond limit available for investors and that too for three years and above. There is obviously significant interest to buy government bonds as well so as and when that limit gets opened up, we could see a large amount of flow come in at that point in time.