Mkt bleeding on US jobs shock, high inflation: HSBC India

Equity benchmarks continued to be under pressure on Monday with the Nifty coming close to breaching the 6100 support level. Yields on government bonds maintained their upward march and the rupee has been slipping to the dollar. Manish Wadhawan, MD and HD- interest rates, HSBC India attributes the all round weakness to the shock from US jobs data and high inflation numbers expected this week. In an interview to CNBC-TV18, he says he does not see heavy FII selling in government bonds, but cautions that market hopes of an improvement in the macro situation and of a reduction interest rates have been belied.

Also read: Can we bank on the Sensex boom? Below is the edited transcript of his interview to CNBC-TV18. Q: This is quite a bit of bleeding. Is this FII debt selling? Is it want of open market operations (OMOs)? What is dragging the market down so much? A: It’s bleeding and it’s a shock for the system. There is nothing to do with the foreign institutional investors (FIIs) selling in India. At the moment, looking at the data of last seven-eight days, it has been very minuscule. Market is in for a shock from the jobs number which came and overall there is a fear of high inflation numbers expected in this week on consumer price index (CPI) or Wholesale Price Index (WPI). Q: Why is the market looking at 2.75 10-year bond yield with fear? Is it the fear that it will unleash the August FII debt outflow? A: The situation is far more different what happened in July-August in India. The FIIs have already sold USD 12 billion worth of Indian bonds in the last three months and so they do not have much of holdings left. Therefore, I do not expect any sharp reaction from the FIIs but the factors domestically and the expectation of an easy liquidity situation has not materialised. It is also one of the factors which will weigh upon the minds of the system. In September policy, Rajan said that he wants repo rate to be effective, overnight rate but in this policy there is a change in stances and there are lot of new things which are coming up. Market is also grappling with the developments the way things are going on; inflation has been higher and is expected to be higher this time also. So, it’s not a question of want to OMOs or looking at 2.75 in US; that is definitely an important factor but it is more of domestic positioning and the new nuances in terms of monetary policy transmission. Q: It has been quite steep in terms of loss in early morning trade and the rupee has slid quite a bit. One these two parameters, what are the levels to watch? A: I did expect this kind of reaction in the system today. On Friday, yields were higher by 14 bps. They have opened around 14 bps higher today. Logically these levels, if you look back into history, these are good levels to go long in the system. We have always seen 10-year in India above 9 percent; for few days it stays here and there and the again the market moves back to normalcy. I would not be surprised by another 5 bps but these are the levels which could hold from here onwards.