Bond prices and the rupee have been rallying for past 3 weeks and since the Jackson Hole speech, bond yields have fallen by 10 basis points to 6.15 percent. The rupee is the best-performing currency from August 1 to September 4, compared to many Asian emerging market currencies.
Strong foreign capital inflows, expectations of the balance of payment (BoP) surplus and RBI intervention is supporting the domestic currency, said Badrinivas NC, Head-Markets & Securities Services of Citi South Asia.
Speaking to CNBC-TV18, he gave an idea of where the currencies is headed, and whether bond yields have much more to go down.
“If you look on the currency, the flows in India have been quite strong across FDI, FPI, both debt and equity for the first time. But in general, we have seen reasonably consistent strong flows, the amount of money coming into the private equity spaces and private deals are also quite strong. The FDI flows are strong so overall, the balance of payment (BoP) surplus, I think last year was a record high and this year also it looks like it is going to be a very strong BoP surplus, despite having higher oil prices and economic recovery, increasing the current account deficit (CAD). So, to that extent, it is no surprise that the rupee actually is a better performer or a strong performer,” Badrinivas said.
He believes that the Reserve Bank of India (RBI) has been building up reserves and intervening at certain levels, while the central bank has not fundamentally changed its strategy.
“Ultimately calling the level of the rupee is a bit of calling what is the intervention levels or strategy of the central bank. They have been if you look at it for the last couple of years, really building up the reserves and intervening at certain levels. This time, what we saw over the last 10 days is really post the Jackson holes speech, there was a bit of weakness in the dollar globally, that led to all currencies performing well and we also saw at that time the RBI actually changed the levels at which they were actually intervening. So, you saw the rupee moving substantially lower by more than a percent. In general, the way I look at the rupee market is, while it is difficult to predict the levels, what is very clear is that there is no depreciating pressure on the rupee.”
On inflation, he is of the view that negative real rates have in the past, led to either sticky and runaway inflation in India, or has led to an external sector deterioration.
"My own view is that on inflation, we will have to see how it pans out. I am not 100 percent sure, whether, we are going to see that kind of inflation because there is an unevenness to the economic recovery and, the employment situation in India. Whereas on the external front, I think there is a lot of comfort; right on the external front, because of the fact that India continues to be a big drawer of global investments. So, I think, we are comfortable on the external side, we don't need to worry too much about it, at least for the next year or two years, maybe till something new comes up, but inflation will have to adjust a bit wait and watch, but I am very comfortable with the RBI’s stance at this point.”
On the global front, he said that the expectation was the US Federal Reserve would start taper in December, but the economic data was getting mixed from a growth point of view.
“There is clearly a lot of data, which is a bit mixed around the growth and the trajectory of the economic recovery. Obviously, there was, employment data where the headline was in great, but at the end of the day, there is also a view in the US forming that many people who actually went out of the job market could probably not want to come back because of some of the fundamental changes to the way behaviours are going to be post-COVID,” he said.
He added, “So, there are mixed views to the whole reading of the data. In general, the data complicates things for the Fed, because there was an expectation that they would start the taper in December, and they had a view that the economy didn't need the level of accommodation that is currently on. So some market participants do feel that there may be a rethink in terms of the timings. Our own view continues to be that they will start the taper in December and the first-rate hikes is probably in Q1 of 2023. But yes, the data is getting to be a little bit mixed from a growth point of view.”
For full interview, watch the accompanying video...