More Stories

Informist, Friday, Aug 30, 2024

 

--YES Bk Nambiar: High leverage in economy may deter steep rate cuts

--CONTEXT: YES Bk trading head Sudarshan Nambiar's remarks in interview

--YES Bk Nambiar: See shallow rate cut cycle starting December  

--YES Bk Nambiar: Gilt yields likely to decline uniformly

--YES Bk Nambiar: Don't see steepening in India gilt yield curve

--YES Bk Nambiar: See 10-year gilt yield under 6.70% by FY25-end

--YES Bk Nambiar: 1-yr OIS rate may not fall below 6.40% in FY25

--YES Bk Nambiar: 5-yr OIS rate may bottom out at 5.90-5.95% FY25

--YES Bk Nambiar: Liquidity conditions likely to remain easy FY25

--YES Bk Nambiar:1-yr dlr/rupee fwd premium rate curve to steepen more

--YES Bk Nambiar: See 1-yr dlr/rupee fwd premium at 2.25-2.50% FY25-end

--YES Bk Nambiar: Rupee may have weakened past 84/$1 sans RBI's grip

By Aaryan Khanna and Pratiksha

 

MUMBAI/NEW DELHI – That India's interest rate cut cycle is likely to be shallow is almost a consensus view by now, premised on the stickiness of inflation. YES Bank's head of trading Sudarshan Nambiar adds another dimension to the discussion: the Monetary Policy Committee would be cautious in easing monetary conditions due to the high leverage in the economy.

 

"What we will do is we will leverage ourselves, we will put the notional money in equity," Nambiar told Informist in an interview. "I don't think at large, when a governor or a policymaker looks at situations, he will be comfortable going ahead and cutting rates like that (aggressively)."

 

Lower borrowing costs in the economy could increase the country's level of indebtedness and lead to a potential bubble in risk asset prices. A rate cut may lead to investors borrowing money and putting it into riskier assets such as equity and real estate, chasing the recent supernormal returns, Nambiar said.

 

"Everybody has forgotten that equity can go negative, equity can give 10-12% return, (recent returns) are not the norm," Nambiar said. "So, I don't think you are going to cut rates in a hurry, at least that's my thought."

 

Retail investor interest in India's equity markets has been euphoric over the past few years. The National Stock Exchange's benchmark Nifty 50 index had risen 28.6% in 2023-24 (Apr-Mar), and crested record highs in the current fiscal year as well. As on Mar 31, unique registered investors on the NSE hit 92 mln, tripling in five years, according to the exchange.

 

Speaking when the equity benchmark index was below 25000 points, YES Bank sees equity indices shoot up if the Nifty 50 ends above 25200 points, terming it a potential "sky breakout". The downside was limited to 22800 points, Nambiar said, less than a 10% correction from current levels. The momentum is not likely to falter as long as the Indian economy does not seem close to a recession. But over the longer term, a correction could be seen in equity markets.

 

"The kind of leverage that India is in, once that cycle starts, it spirals down," said Nambiar, who has spent nearly two decades at YES Bank. 

 

FIXED INCOME, RATES

Nambiar also flagged the possibility of inflation rearing its head if the rate cut cycle goes beyond 50-75 bps. With the policy repo rate at 6.50%, CPI inflation in the coming months may fall below the RBI's estimates and make the case for a shallow rate cut cycle beginning in December, the trading head said. While he stays constructive on bonds, he said the government bond yield curve is likely to decline almost uniformly, eliminating the need to cherry-pick stocks.

 

"So all in all, your rate curve here (in India) will be flat. Playing on spreads is not going to be lucrative, it's going to be sitting long bonds that is going to yield you money," Nambiar said. "Nothing else on trading calls will work."

 

YES Bank's trading head said he expects the 10-year gilt yield to fall to under 6.70% by March from the current 6.86%. Life Insurance Corp of India's imminent entry into the bond forward-rate agreement segment will help pull down long-term bond yields, but may create a floor for overnight indexed swap rates going ahead, Nambiar said. The widely popular derivative instrument entails banks buying long-term bonds with an agreement to sell these to insurers at a later date, on a cash-settled basis.

 

The country's largest life insurer said after its Apr-Jun earnings that it had a policy approved and had tied up with banking partners in this area. Its entry into the bond derivative segment is expected to create additional demand for long-term papers.

 

"Demand and supply will affect rate curves, rather than pure 'where is your repo rate headed?'" Nambiar said. 

 

The one-year swap rate is unlikely to fall below 6.40% in the current financial year ending March, while the five-year swap may bottom out at 5.90-5.95%, Nambiar said. Currently, the one-year swap is at 6.49%, and the five-year contract at 6.08%. Receiving these rates could still be lucrative, but it is in bonds where the supply-demand dynamics are too compelling to ignore. Banks have to maintain larger buffers of liquid assets such as government securities due to a proposed tightening of the liquidity coverage ratio guidelines, and this is likely to lead to a supply crunch at the short end of the government bond yield curve, Nambiar said.

 

LIQUIDITY, FORWARDS
Liquidity conditions are likely to remain easy, and overnight rates in the triparty repo market will trade between 6.25% and 6.55?fore the rate cuts, according to the YES Bank trading head.

 

"I don't see stress in the liquidity situation for the rest of the financial year...I don't think anybody in the market has been able to read RBI innovative measures beforehand," Nambiar said. "Easier monetary conditions are here to stay. That's why I'm looking at steepening on the FX side."

 

He expects the dollar/rupee forward premium rate curve to steepen further and sees the one-year premium level rising to 2.25-2.50% by the end of the current financial year. This month, the one-year forward premium scaled a 15-month high of 2.14%, as the interest rate differential between India and the US is seen widening due to rising odds of a rate cut by the Federal Reserve in September.

"The far end of the forward curve, the 1-year - will be a rate curve play. The interest rate differential should inch up till 2%. So, if you inch up to 2%, you should see the one-year yield at 2.25-2.50%," he said.

 

With the Fed expected to go for a rate cut of at least 25 bps in September, and no sight of a rate cut by the Reserve Bank of India yet, the interest rate differential between the US and India is likely to rise, driving dollar/rupee forward premiums higher. Nambiar said in 2024, he expects the US Federal Open Market Committee could cut rates by 75 bps.

 

RUPEE
Nambiar sees the recent fall in the rupee against the dollar as "absolutely nothing", attributing it to the strong demand for dollars from gold importers after Union Budget 2024-25 (Apr-Mar) reduced the customs duty on the yellow metal to 6% from 15%.

 

The domestic currency fell to a record low of 83.98 a dollar on Aug 12, and has fallen 0.2% this month against the dollar.

 

"Post Budget, what has happened is you have seen a 25 paisa move from here. Most of the demand would be from gold. They hadn't bought for a long time."

 

Nambiar is of the view that if it wasn't for the RBI's strong hold on the Indian currency, the rupee would have gone past 84 per dollar a long time back. He expects the Indian unit to go to 84.50-85.00 a dollar by the end of the current financial year.

 

This month, the central bank has been actively selling dollars in the domestic spot and offshore non-deliverable forwards market to keep the Indian unit from falling below the psychologically-crucial mark of 84 per dollar. 

 

Nambiar does not expect importers to hedge actively amid the ongoing low volatility in the exchange rate and the RBI's active intervention. "I don't (see volatility in the rupee), unless there are events. I don't think geopolitical risks are there. Let us see what happens in US elections," he said.  End

 

US$1 = 83.86 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Avishek Dutta

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

 

Informist Media Tel +91 (22) 6985-4000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2024. All rights reserved.