The yield on the 10-year benchmark bond touched its highest levels in eight months last week after hawkish comments in the minutes of the Reserve Bank of India’s monetary policy committee meeting. Pradeep Khanna, managing director & head of trading, global markets (India) at HSBC, told Shamik Paul that the RBI will maintain its cautious stance in its next monetary policy review and that the benchmark yield is trading at an attractive level. Excerpts:
What is your view on interest rates in India? Do you see the benchmark yield trade in a narrow band in the absence of major cues?
I think we are in a situation where, in the medium term, the RBI will hold its rate steady while maintaining a cautious stance. In the policy review in June, I do not expect a huge difference in the RBI’s tone. The RBI has an inflation target of 4%. In the past, we have seen that inflation can rebound strongly and quickly after coming down. The RBI has been cautious on inflation and it will remain so.
Benchmark yields are likely to trade in a range around current levels. Current yields are at a reasonable level and are quite attractive if policy rates remain steady. Because of the increase in liquidity due to demonetisation, short-end yields had become too low. But the measures taken by the RBI have had desired results and short-end yields have corrected.
The rupee recently touched a 20-month high against the dollar, but has pared some gains since then. Where do you see the currency in near term?
The rupee is likely to trade in a band of 64-66.50 per dollar in 2017. The market has been surprised at the extent to which the rupee recently strengthened. The RBI’s approach towards the rupee seems to have changed and it appears to be far more comfortable with the currency’s strength. This is partly because the dollar has weakened against other currencies, including those from India’s competitors in the exports market, and not against the rupee alone. This has given some amount of comfort on the exports front.
The second point is that a weaker rupee is inflationary, and the RBI had pointed out the upside risk to inflation from a weaker rupee. ?Conversely, rupee strength should provide some comfort from an inflation control perspective. In 2014 and 2015, intervention by the RBI seemed to have an element of reserve building and reserve replenishment. The central bank had also been buying dollars to deliver when the FCNR deposits matured. In today’s scenario, that doesn’t appear to be the primary objective.
What is your view on the global market? How do you expect the dollar to move in coming months?
The market has fully discounted a rate hike by the Federal Reserve in June. A second rate increase by the end of the year has been priced in as well. The question to ask is what if two hikes don’t happen. Additionally, the Fed looks to be focusing on how to taper the balance sheet. We don’t see the dollar gaining strength given that all these are already priced in.
Secondly, market expectations over the new fiscal plans and infrastructure development plans which were viewed as stimulants for growth and inflation seem to have been muted, as people have realised that it will not be easy to implement these quickly. This could have a negative impact on the dollar.