Rupee unlikely to hit 70/$; see calibrated fall: Federal Bk

Anuj: What is your call on the currency first? We have seen some resilience but do you sense that that resilience is getting over now?

A: I think resilience is there and that would be a function of what type of capital flows come after the year is over. That means the month of January would be very crucial to see further capital inflows into India. Of course that would depend on what type of expectation build up is happening vis-à-vis the rate action in US. So if the rate action is slow, if it is expected to be a very moderate one, I think there would not be much of an outflow happening from India to the US because after all money also chases growth. What is required is, I think the confidence of investors to believe in growth story of India and the required enablers in place. Ordinances one after the other - three already done, one more in offing would definitely show the intent of the government as far as the fiscal reforms are concerned. So I think it would be an interesting time to watch. January to March is going to be an important quarter for expectation build up as far as India story is there.

Ekta: For the January to March quarter, what is your expectation in terms of the rupee? I was talking to one of the traders to give strategies on the rupee yesterday and he mentioned that they will not even be surprised with 70 per dollar by March, do you think that is possible or likely on the rupee at all?

A: No, I do not belong to that particular school. I would say that there could be a gradual, calibrated depreciation and when I say that it is not going to be more than three-four percent annualised. In between you may have a spike but then that could be temporary because we would have lots of measures that can be taken because we saw it last year when the position was very bad, when India's fundamentals were difficult ones for anybody to bring in money into India and still we saw resilience in domestic currency despite current account deficit (CAD) of something like 4.5 percent to 4.8 percent of gross domestic product (GDP) in one quarter being as high as 6.5 percent of GDP - all-time high post independence. We still could get our rupee back to somewhere around 58.33/USD by last week of May. So if that is there, I am not a pessimist, it is not going to help anyway because if we are going in for counter inflationary measures, one of the things which monetary authorities as well as the government of India would look in to is prevent abrupt depreciation of domestic currency because steep depreciation of rupee would also be inflationary.

Anuj: What is your call on the bond market because there was almost a one way rally that got stalled somewhere in the middle of December? Last two weeks or so there has been a bit of a volatility in that market as well. What is your call on the 10-year from now and what kind of yield would you expect in next six months or so?

A: I think the rally was backed by three-four important factors. One was zero percent wholesale price index (WPI) for the month of November, another one was the consumer price index (CPI) being somewhere around 4.38 percent not seeing the levels, not seeing for pretty long time more than three years or so and then even in international markets, the inflation numbers of US were lesser than expected. Euro growth was practically nil, Japanese growth also and inflation numbers were also below these things. All these things put together made people believe that there could be some rate action coming immediately and as a result of that maybe market immediately discounted all these things and went in for a rally, which took it to 7.78 percent or those levels or so. That was despite there being no rate action happening in December policy wherein repo rate continued to be around 8 percent.

What is important to see now is that there is going to be some adverse base effect coming into the picture as far as inflation is concerned, wherein inflation may move from 4.38 percent straightaway to 5.5 percent when you see the December numbers where 137 bps was the fall last year same period, from November to December CPI had fallen by 137 bps and WPI had fallen by almost 108 bps. Same thing would happen from January to February also. When the January numbers come out in middle of February, again there is an adverse base impact.

Third one is for February also it is mild, it is not as steep as for December and January vis-à-vis the previous months. So as a result of that for the next three months, you are going to have the adverse base effect which would take CPI to maybe closer to 6.5 percent or even touch 7 percent, I will not be surprised. That all depends on what type of pricing happens on petrol side.

Ekta: In that context in the next three months where do you expect the 10-year to possibly go to or what would be the range?

A: As far as market expectation is concerned, nobody is denying a softer rate regime in calendar year 2015. The only issue is when will the rate cut start. Does it start in February or does it start in April? For calendar year 2015, you may have different voices but anybody would be predicting something like 50-75 bps cut happening despite expectation of rate hike happening in the US. In that background, 10-year benchmark should hover between 7.80 percent and 8 percent for sometime unless you see the contours of what is coming in.

Ekta: Can you share an exact range for the rupee for us at least in the foreseeable future for the next three months according to you in Q1 of the next calendar year?

A: 63-65/USD.

Ekta: Do you think we can retest the earlier lows of 68/USD at all?

A: I doubt.