With large foreign capital inflows into the economy, the Indian currency has appreciated by nearly 4.5% since the beginning of the year. Data from the Securities and Exchange Board of India (Sebi) shows that foreign ownership of Indian bonds and stocks reached an all-time high of $12.3 billion and $77.7 billion, respectively, this month. Speaking with FE?s Mahalakshmi Hariharan and Shobhana Subramanian, Hemant Mishr, managing director and head of global markets, South Asia, Standard Chartered Bank, says corporate spreads in the overseas markets have started to compress as the outlook for India improves. Excerpts:

What is your outlook for the Indian currency?

We expect the rupee to touch 42 against the dollar by the year-end, given the large capital inflows. Currently, the Reserve Bank of India (RBI) has stayed away from the market but it is keeping a close watch on capital inflows, liquidity and the exchange rate. It?s unlikely there will be any intervention to prevent heavy appreciation. The government also has a large borrowing programme which needs to be conducted in a non-disruptive manner. We must also not forget that our current account deficit and trade account deficit are widening as a result of which we need these flows. In the past one month, more clients have been convinced the rupee with strengthen and those that are not hedged are worried. As risk appetite increases, we expect the dollar to weaken and that will translate into dollar weakness onshore India.

Where do you see the Euro headed?

We do not expect the Euro to weaken substantially against the dollar and are looking at a level of 1.45 by the end of the year. This will happen if the financing for Greece, which is expected to happen at the end of May, goes smoothly. If you see, the Euro has corrected the most and has come off due to the crisis in Greece and the situation in Europe still looks bad with the GDP growing at 0.1%.

How do you read the demand from corporates and banks for overseas funds?

There is a lot of interest from the corporate and institutional players for overseas funds and external commercial borrowing (ECB) and ECA loans continue to do well. There is a pipeline of projects which needs to be funded.

Has there been any improvement in spreads?

The latest S&P report, changing the outlook for the India territory, has resulted in a higher appetite for funds and credit spreads have also compressed. Nationalised banks are picking up funds at attractive rates and a corporate with an AAA rating could raise five-year money at a total cost of 8.75%.

The swap cost for a 5-year paper could be about 400 basis points and the spread at 200 basis points. At the same time, an ?AA?-rated corporate could fetch a rate of 10.75%.

How large is the appetite for corporate bonds in India?

There is more appetite for short term paper, especially tenures of between the 2-6 years. The yiled curve is somewhat steep at the lower end with the two-year bond quoting at 6.11% and the 6-year paper at 7.50%. Currently, the spread between the corporate and government bond stands at around 100 basis points.

How liquid are the bond markets today?

Total traded volumes in corporate bonds are close to Rs 3,000-4,000 crore a day and average about Rs 8,000-10,000 crore a day in government bonds.

The FII investment limit of $5 billion in government bonds has been hit. As for corporate bonds, at least 80% of the investment should be in the held-to-maturity category.

The regulators are keen on developing the corporate bond market and we?ll have to see if the limit for FII investment in corporate bonds is raised from the current $15 billion as the credit off take is also expected to go up in the coming months. We feel that interest rates will be tightened over the next 12-16 months after which there would be a ?status-quo? on the rates.