Play your cards with care on rupee. Nomuras Vivek Rajpal says why
Rupee has been commanding political risk premium of late, says Vivek Rajpal, Asia interest rate strategist, Nomura India, talking to ET Now. A pricey oil and spike in US bond yields are turning out to be its irritants.
Do you believe that yesterdays political uncertainty pushed the rupee beyond the January 2017 levels?
Political uncertainty clearly played out. The Indian rupee (INR) has been commanding some kind of political risk premium especially this being a pre-election year and Karnataka state elections were carefully watched and implications analysed. Though BJP turned out to be the single largest party, there is uncertainty about who will form the government. This is clearly weighing on the market. Of course, there are bigger factors oil prices, US treasury yields rising as well. Overall, it is better to stay cautious on INR.
What is your outlook going ahead? Domestic as well as global macro factors have been putting a fair amount of pressure on the Indian currency, the biggest concern being the higher oil prices. Larger oil import bill could mean that Indias current deficit account could widen to about 2.2-2.3% from the current 1.9%.
Rupee clearly depends on number one, how the broad dollar is doing and number two, clearly rise in commodity prices. If the oil price rises, then India being a commodity importer, suffers the most. This is one of the reasons why we are seeing underperformance in INR vis-à-vis the broad EM currency complex. The thought process here is that near term one should stay cautious on INR. At the moment, things do not seem to be in place for a meaningful change in INR.
While INR has weakened a fair bit, the Indian bond yields are far from weakening and the upsurge has continued and now it is at a three-year high. What is your view there?
Bond yields are rising. As crude oil prices adds to inflationary expectations and uncertainty on the fiscal deficit front, it is clearly weighing on the market. The recent inflation trend where core CPI surprised on the upside, has also increased the likelihood of rate hikes. This is also weighing on the bond markets and bond yields are likely to go higher gradually until we reach a stage where market starts thinking about what will be the terminal rate in this upcoming rate hike cycle from Reserve Bank of India.