'RBI likely to cut rates next week'

With the Nifty touching 10,000 mark for the first time, Ashish Parthsarthy, Treasurer at HDFC Bank, talks about the concerns that the risks, especially globally, aren't being priced correctly and any unprecedented event may drag down the market across the globe including India. However, he feels that with inflation falling, the Reserve Bank of India (RBI) may cut rates by 25 basis points (bps) when it meets next week on August 2, 2017 which is also evident with the fall in 10-year G-Sec. Meanwhile with strong flows coming into the market he expects the Indian rupee to remain firm and move in a rage of Rs 64 to 65.5 against the dollar.

Edited excerpts of an interview with Mahesh Nayak:

1)With CPI down do you think the RBI will cut interest rates and why?
CPI for June came at 1.54%. Actual CPI inflation has been consistently coming lower than RBI forecasts. Inflation forecasts by many analysts suggest that the actual inflation for the remainder of this financial will be lower than the revised forecast made by the RBI in their last Monetary Policy review. There is an expectation that the CPI inflation for March 2018 will be below 4 per cent and that the average CPI inflation for this fiscal year will be around 3 per cent. Given that and the fact that the output gap is negative, I think that the RBI will reduce the repo rate by 25 bps in the August review and that there is a good chance that this rate could be reduced by another 25 bps in the January-March 2018 quarter.

2)Why is the market lapping the 10 year G-Sec paper when the same maturity G-Sec paper is trading 50 to 60 bps higher than the 10 year G-Sec? Is it an indication that market is expecting a fall in interest rates?
The benchmark paper always trades at yields lower than the other G-Secs. Whenever there is an expectation of a fall in interest rates the fall in the yield of the benchmark G-Sec is quicker. Yield on other G-Secs eventually fall after some time has elapsed.

3)What is your take on the Indian rupee? And Why? Do you see the rupee appreciating from the current levels which can help India Inc as it would change their credit profile and help in bringing down debt?
The view on the rupee is that it will trade in a narrow band. There is appreciation pressure on the currency because of the strong FDI and FPI (especially debt) flows and a contained current account deficit. These conditions are likely to prevail for some more time and hence the rupee is unlikely to depreciate by a large amount. The RBI could absorb the excess supply of the foreign currency inflows over a period of time thus reducing the appreciation pressure on the rupee. Hence the expectation of range bound USD/INR movement. The range bound exchange rate is unlikely to have any major impact on the industry.

4)What are the concerns you see for our market? Basically what can go wrong that can hamper the rally?
It is expected that the Federal Reserve, ECB and BOE will start reducing the QE in their respective economies. The Fed has stated that they would start the process of reducing their balance sheet size and they are already in the process of increasing the policy rate. The above is likely to reduce the amount of portfolio flows into India. However this is unlikely to have any major impact on Indian markets or on the economy. However there is a widely held view that equity markets around the globe, including India, are richly valued; volatility is extremely low; and risks are not being priced correctly. This opens all the markets to a risk from some unanticipated event. If any such thing happens then one will see large correction in all markets.