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ICICI Bank says soaring oil prices, weak rupee primary concerns for bond market

ICICI Bank says soaring oil prices, weak rupee primary concerns for bond market

ICICI Bank says soaring oil prices, weak rupee primary concerns for bond market
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By Latha Venkatesh   | Sonia Shenoy  Sept 6, 2018 6:30:14 AM IST (Updated)

The primary concerns in the bond market right now are the soaring crude oil prices which has now actually gone up by around 10 percent over the last two weeks, and also the dollar-rupee rate which is consistently strengthening. said B Prasanna, head, global markets group, ICICI Bank.

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These two concerns are top of the mind for all the bond market participants at this point in time, said Prasanna.
"Along with this is the whole emerging market contagion which is spreading across countries and concerns in the bond markets whether RBI will do something in terms of interest rate defence,” he said.
The swap market is pricing in two 25 basis rate hikes in the October and December Reserve Bank of India(RBI) monetary policy, Prasanna.
Edited Excerpts:
We thought that it would go down to 8.04 percent with crude falling but 10-year yield is back at 8.07 percent now and climbing. What is your sense, does it go all the way to 8.25 percent?
The primary concerns in the bond market right now are the soaring crude oil prices which has now actually gone up by around 10 percent over the last two weeks, and also the dollar-rupee rate which is consistently strengthening.
These two concerns are top of the mind for all the bond market participants at this point in time, and together with a whole lot of other emerging market contagion which is slowly spreading across various countries, there are concerns in the bond market as well as to what extent whether the Reserve Bank of India (RBI) will do something in terms of interest rate defence.
That fears are not really going to come true immediately. The concerns are from the fact that for example, the monetary policy last month, there was a view that RBI might stay put for the next couple of policies at least because of the words used by the deputy governor who said that there are leads and lags in policy hikes and there was a call that they might wait.
However, having seen the move in both currency as well as oil over the last two weeks, there are some participants who are turning around to the view that there could be a rate hike as early as October.
Swap market if you look at it, it is actually pricing in two rate hikes of 25 basis point both in the October as well as in the December policy.
A few bankers are expecting the RBI or the finance ministry to announce a fresh set of measures to cool off the yields. There has been no intimation so far, but would you expect anything of that sort, and if yes, what would those measures be?
I think the government has consciously been aware of the borrowing cost which has been consistently going up and they have been managing to some extent in the past few months in terms of whether it is to reduce the borrowing programme in the first half and they reduced it by Rs 50,000 crore or through any other measures.
However, the fact of life is that to some extent this is also a global market and to take of control of a fundamentally driven move is very difficult for any regulator or any government standby.  To some extent, I think that would also play in the minds of both the government and the Reserve Bank.
While I do not expect anything immediately, but I think things like tinkering with the borrowing programme like whether they want to go more towards short-end rather than the long-end, those kind of things are always possible.
There are also concerns on fiscal deficit slippage. I am sure if that were to happen at the time of the announcement of the calendar, yields are going to shoot up even more.
So, hopefully, those things should not be taken into account at this point in time and they should be very cautious about their own borrowing programme going forward.
You are saying that the market is now factoring two more hikes. In that case is 8.07 percent pricing that or should we expect the yields to rise even further?
I was deriving the pricing from the swap market. So it is difficult to really figure out from the G-Sec yield curve as to what rate hikes are factored in because a whole lot of other inputs goes into G-Sec yield curve like demand and supply and so on so forth.
From that perspective, I would only say that while Overnight Index Swap (OIS) market is actually predicting 50 basis points of a rate hike, it is not to say that yields will not go up if actually, a rate hike were to happen because now we are very clearly in a rate hike cycle.
When we started the cycle it looked like 25 and done, then it looked like 50 and done, then it looked like there might be a long pause and after which the RBI will come and hike, but it now looks like there might be an imminent third hike, if not in October, at least by December and then a fourth hike by February or April.
So in this kind of a scenario, it is very difficult for any market participant to take comfort that it is fully pricing in and hence bond yields have fully reacted. Obviously, if a rate hike were to come in, yields will go up a little bit more and we have to counter that as the things go by.
Yesterday there were some market participants who were saying that exporters are asking whether they should hedge not just three but six months forward and importers were shying away from buying dollars. The sense I got was that there is an exhaustion of selling, exhaustion of at least buying dollars. What is your sense, is the correction over or do we overshoot even 73 per dollar?
It is very difficult to get a gauge of all the clients, all the exporters and importers as to what exactly their views are, but I will just say that that is probably not what the signal that I got when we were speaking to clients.
Exporters, for example, are still not looking at this as great opportunity to go and outright sell in the forward market, they are actually using option structures which actually enables them to participate a little bit on the upside which basically goes to show that even though they realise it is a good level, they probably think that they will get even better levels and they do not want to lose out on that opportunity to sell at a higher price.
Similarly, importers are not really again coming and thinking that it is a very high level, let me not buy, it will settle back below 70 per dollar so let me wait and buy. Whenever there is a dip in dollar-rupee, I think they are using the opportunity to hedge.
So from that perspective, I would say that a large part of this move is predominantly the clients do feel it is fundamentally sustainable. Maybe it will not go back to 68-69 per dollar but I think we are in the 70-72.5 per dollar kind of range.
However, having said that, a lot of this move will depend upon how crude oil moves, a lot of it will depend upon how emerging market currencies' move because at the end of the day we are not alone in this world.
I think the dollar-rupee depreciation from the calendar year beginning if you really see, it is more or less tied up with the Chinese currency or even the Indonesian currency to give or take a few percentage points. So I think those trends are very important for us to look at.
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