Brexit will be bad for rupee and equity: Sudhir Agrawal, UTI MF

In a chat with ET Now, Sudhir Agrawal, Fund Manager Fixed Income, UTI MF, says bond market will have a mixed reaction but there will be a lot of volatility. Edited excerpts



ET Now: How nervous will be the markets stepping into in June? There's a week to go for that and counting down to first, the Fed meeting is slated for 14-15 June and then the Brexit vote comes up on 23rd June.

Sudhir Agrawal: I will say globally there are lots of events now that will definitely impact the sentiment. Brexit will be something which will create a lot of uncertainty just before the event but I will say rather we go with the Citi view that there are higher chances that the Brexit might not happen and they might actually remain within the EU. But then just around that event, we might see lot of uncertainty and associated with a lot of volatility in the global markets. The Fed meeting is an important event at the moment because if you look at the probability being indicated by the Fed fund futures, it is hardly pricing in even one rate hike during this entire one year. So, at the moment, the market is probably underpricing the risk of a Fed rate hike.

We might expect a lot of volatility around that event coming back into the market. This might result in some bit of weakening on the Indian rupee. This might also result in some bit of risk off kind of scenario. I think from here on, it will be important to see even if the Fed is to hike, then what kind of language will they use because at the moment, the market is just not ready for a Fed rate hike.

ET Now: Volatility and uncertainty is a given till these two cues really build up. But talking about India specifically, what do you think will be the impact of a Brexit if it is to happen?

Sudhir Agrawal: If at all, Brexit might create a lot of volatility on the rupee side. So overall, we might see the US dollar strengthening and the rupee might weaken a bit. So I will say for the currency market, it will definitely be bad. From the equity market perspective definitely there will be concerns about the global growth and hence we might see some kind of outflows also happening across world over in the equity market.

The bond market might have a mixed reaction. In developed markets' bonds, we might see a lot of flight to safety kind of a sentiment whereby we might see the bond yields coming off if at all Brexit is to happen. But overall, because of the poor sentiment and a risk off kind of scenario, we might see the emerging market currencies underperforming and hence on the emerging market bonds there might be a mixed reaction.

So from currency perspective there might be poor sentiment but overall for a country like India that might also mean a lot of RBI intervention and hence probably that might increase the probability of higher OMOs which might again work in favour of bonds. So I will say for bonds it will be volatile, just to summarise, and for equity and rupee it might be bad, the first reaction.

ET Now: Your expectation on bond yields and also what it means for the rate cycle?

Sudhir Agrawal: I will say bond yields are just not going anywhere. The 10-year benchmark G-sec is trading in a tight band of Rs 740-750 band and we need a really strong trigger for the market to break this range from either side. So I will say at 7.5, we are seeing a lot of support because a lot of OMOs are lined up. RBI has already said that they want to move the liquidity to the neutral zone by doing OMOs over a period of next one year. So we are seeing a lot of supply being absorbed and hence at current levels, there is a lot of comfort.

But overall, we are expecting that in this kind of volatile environment, there is a possibility that just ahead of Fed, just ahead of Brexit, there are chances that temporarily it might break that 7.5 band and probably might go into 755-760 range. But I think that probably it should be an opportunity to add positions because we do not expect this impact to last for longer and considering that OMOs, the situation is still positive. So overall we are expecting lot of demand to come at those elevated levels if at all we are to see that.