See rangebound Rupee; 25 bps RBI rate cut on June 2: Nomura

Ekta: Before we start talking about the currency and the bond markets at this point in time, wanted to get a sense in terms of how you read the trade deficit data for the month of April, what were the key takeaways for you from the data?

A: April data was a little stronger than what we had expected. Our economist had forecast a deficit of about USD 13 billion and came in at around USD 11 billion, so it was somewhat stronger than what we had expected. So, clearly exports didn’t fall as much and imports also while there was a pickup, there wasn’t as much of a pick up so net-net it was a slightly stronger data and it is pretty consistent at about USD 10-11 billion a month, we are looking at about 1.5 percent of GDP as the current account deficit which in our opinion is quite easily financeable through the FDI flows alone, so with this kind of trend in the trade data, it just feels like that we will see another year of a reasonably high balance of payments surplus, so that is fundamentally quite positive for the currency.

Anuj: So, what kind of trend do you see in currency? Till three or four days back it looked like a move towards 65 was going to happen rather swiftly but we have seen a bit of comeback now. What kind of trajectory would you expect for the currency?

A: It is dependent upon two factors, one is the RBI’s intervention strategy from both sides of the market, second is dependent upon global commodity prices and especially crude because that is the largest commodity that we import and it has a large bearing on our current account but given the fact that we still continue to be in a situation where there is likelihood of continued capital flows, FDI flows are also expected to pick up, so given all of these factors, the rupee is going to be a pretty range-bound currency now. Between 62 to may be 64-64.50, that is the broad range for the currency. Clearly rupee is now a very international currency and lot of players globally look at this currency as a part of Asian index, Asian basket, so whatever happens to dollar and its performance against the major currencies and also emerging market currencies also has some kind of bearing on INR, so that cannot be completely ignored but barring any large movements in that I would expect that it is like 62 to 64-64.50 range.

Ekta: How closely related are we to what is happening in the global bond yields, for example the US treasury as well as the German bunds and do you think that once maybe there is stability in the global bond yields, the US tenure becomes more range-bound that there could be some amount of flows that could come back into the Indian debt markets more structurally?

A: To the extent that we have now global large investors investing in Indian fixed income market and these investors actually look at all the markets to arrive at their own decision as to which country they want to invest in, any substantial volatility or any significant increase in volatility in any part of the world tends to have some effect on us, on our flows. At this point in time that effect is not very large but it still does have some kind of an effect and I agree with your assessment that once the volatility in large markets such as Europe and US stabilizes, we should see investors start looking at India once again and the interest rate differential is still quite large and the fundamental factors which were responsible for investors finding India attractive, to a large extent this still continues. So, flows should resume once we see this volatility coming under check.

Anuj: And what would that mean for the bond yields because last week there was a genuine risk of 8 being breached, now we are back to 7.85 thereabouts. What kind of trajectory would you expect?

A: Market has tried to take out 8 percent level but hasn’t been able to successfully do so despite pretty strong negative headwinds, so that is a comfort factor and after two devolvements by RBI both in T-Bill auction as well as in the bond auction, market is of the opinion that RBI doesn’t really want to see the yields to significantly go up, so we are seeing some kind of a reversal now. The big decider of the yields will be the new 10 year bond, we are expecting that to be auctioned any time now and once that bond comes in, we will see a rest of 10 year yields to about 20-25 basis points lower than where we are and that is going to be the new benchmark yield. So, I do expect that if the global markets continue to trade stable, our 10 year old bond should continue to drift towards 7.75 or maybe towards 7.75-7.80 level and the new 10 year bonds should then cut of at around 7.60-7.65 level.

Ekta: What is your expectation from the RBI June 2, and how much of it is factored in?

A: The base case still remains for a 25 basis point rate cut on the next policy. But it is a little bit of a close call. The data has not been all that great. There has been some marginal uptake in inflation and the near the entire process of disinflation is sort of come to a steady state. So, the market has not really factored in the full 25 basis point rate cut in my opinion. So, if we were to indeed get that rate cut, there is a possibility of bonds rallying towards seven and half level. We will also have to see how the market trades between now and the time when the policy is announced. We still have about a week or ten days left to that, in terms of trading days. So, we will see how the market trades. But I feel that if we were to look at from a today’s market price action point of view, I still feel that there is a scope for bond yields to rally.