Speaking to CNBC-TV18, Ananth Narayan, Head-Financial Markets at Standard Chartered Bank, said he does not expect short-term funding rates to move higher.
Ananth Narayan, Head-Financial Markets at Standard Chartered Bank, said that Reserve Bank of India’s monetary policy decision yesterday, which was announced on Wednesday, would in an oblique way help the rupee remain on the stronger side.
Speaking to CNBC-TV18, he said that foreign institutional investor (FII) money would flow into the country including into debt, as external participants would see the central bank’s monetary policy as being credible and inflation-oriented.
He added, however, that this may not necessarily be good thing as there could be unhedged exposures in the short term.
Narayan said he does not expect short-term funding rates to move higher as compared to 10-year bond yields, adding that bonds and commercial papers will get anchored by the slush of liquidity.
V Ravi, Chief Financial Officer at M&M Financial Services, said that he expects the cost of money to fall after April 1, adding that he does not expect a sharp spike in interest rates.
Below is the verbatim transcript of Ananth Narayan's interview to Latha Venkatesh & Sonia Shenoy.
Latha: What is your sense? We saw money becoming expensive or yields going up by 30bps. Is that it or do you see the 10-year going towards 7 for the next six months. Will it remain at these levels?
A: I think the curve will steepen from where we are. Yesterday's move from accommodative to neutrality was a shock for the system and at the same time we must remember that there is an overhang of surplus liquidity in the system which the RBI itself projects will remain for the greater part of the first half of this year - that should keep the short end of the curve supported. So I suspect that if you are at 6.25 percent of repo rate, market no longer discounting any more rate cuts and let us assume that we stay static at 6.25 then 50-75 bps premium over the overnight rate for the 10-year does sound reasonable, so to that extent 6.75 to 7 percent could be expected on the 10-year.
I do expect some eventual demand to come in even for the longer end of the curve though for a couple of reasons. One, the government supply will stop with tomorrow's last auction, thereafter there is no more supply coming through plus when you have so much of liquidity sloshing around, there will be demand for bonds....
Latha: We were actually looking at it from the non banking financial companies (NBFCs) angle. So for commercial papers (CPs) and those who are raising money through CPs and debentures, is money more expensive in the next six months than it was in the previous six?
A: Yesterday after the announcement there was a popup in all kinds of interest rates including the short end. So a Treasury Bill Rate, which was around 6.1 percent handle, you would expect that to be in 6.25-6.30 handle today, but that will subside. As I mentioned in the lower end the rates will gravitate downwards given the fact that there is an overbearing amount of liquidity in the system and given that credit offtake is just at 5 percent, banks will have little avenues to deploy this liquidity. So bonds, CPs, certificate of deposits (CDs) eventually yields will get anchored by this slush of liquidity. So I do not think short-term funding rates will pop up as much as the 10-year bond yields will. They will remain anchored maybe 10-15 bps higher than where they were yesterday.
Sonia: Your view on the rupee because now the yield differential between the developed markets and India has widen quite a bit. So do you see a lot of foreign money coming into the rupee?
A: I do think rupee will remain on the stronger side now and in an oblique way it is helped by yesterday's monetary policy. However, as you mentioned interest rate differentials will widen given yesterday's policy stance change and that means a couple of things. One, in the medium-term we will see foreign institutional investors (FII) money coming back into the country including into debt, external participants will see yesterday's policy as being credible and inflation oriented and therefore India being a good bet to eventually bring in some money. Second, from hedging cost perspective the moment differentials widen, you have exporters who will want to take advantage of higher premia and importers will be loath to pay that kind of cost. It is not a great sign to be honest because that leads to unhedged exposures going up in the country but that is a trend that could play out in the short run.
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