Markets have always run ahead of RBI moves: Amandeep Chopra, UTI MF

In a chat with ET Now, Mythili Bhusnurmath, Consulting Editor and Amandeep Chopra, UTI MF discuss macro cues and how excess deposit growth in the banking system will o make them at least mop up some of the G-Secs to build up their SLR requirements. Edited excerpts

What happens to the currency is anybody’s guess but what is happening to the bond yields and the correction that we have seen, do you reckon that will continue? Does that price in any kind of action by the Reserve Bank on the upcoming policy?

Mythili Bhusnurmath: I was quite amused -- because I am an economist by training -- to find that there is so much faith still in what economists say about the currency because I thought economists along with central bankers were a largely discredited breed. But clearly, people have great faith in economists’ predictions. I really wonder whether any economist would have foreseen either the Trump victory the consequences, demonetisation or the consequences. Frankly, nobody knows where the rupee is going to go except for the fact that there is an underlying weakness driven more by the strength of the dollar and the weakness that we see in the Indian economy post demonetisation.

Beyond that, it would be foolhardy to stick one’s neck out and say where the rupee is going to end. I do not think anybody has a clue.

As far as bond yields go, certainly this is driven by the fact that there has been an influx of deposits into banks. So banks have been cutting their interest rates. At the same time, there has been pressure and there is demand for Indian bonds given the fact that even though the US interest rates are going to look up and the yield differential has been narrowing, you will find this pressure on interest rate on bond yields. But where they will end remains a big question mark. Will it be sustained? Unlikel. How long will it last? Nobody really has a clue but may be Amandeep keeps a better track on these because at the UTI Mutual Fund you certainly would have to know because you have to answer to all your subscribers and tell them which fund is good and which is not is this a time to go into bonds, is this a time to go into equity. What would you suggest bonds or equity which one has a bigger story right now?

Amandeep Chopra: I am naturally biased towards fixed income funds. If you really look at how we see the markets going forward, it is difficult for an investor not to have some allocation on duration funds effectively meaning the long term bond funds. This is primarily because fairly big events have been unfolding as we speak and it is tough to imagine that the central bank will not ease further from what was earlier anticipated.

Also, the excess deposit growth in the banking system will also make them at least mop up some of the G-Secs to build up their SLR requirements. So we have had two very strong domestic trends which are bond supportive -- one largely being around the banks with their deposit growth and the second one is that earlier the consensus estimate was may be 25 bps rate cut from RBI and an outside chance of another 25 may be around Feb-March.

Today, the street clearly expects upfronting of those 50 bps as early as December and may be a one to two more rate cuts for rest of the financial year as well. So those are the two key drivers for local markets. Clearly from our standpoint, a small allocation and duration will not be unwarranted but you may again actually see some retracement on the 10-year from where we have seen it touch today before it really rallies further.

Mythili Bhusnurmath: A lot of people are thinking now that the RBI will cut rates even though as I said the RBI monetary policy committee MPC meets before the Fed. My question to you is not whether the RBI cuts 25 or 50 bps, the question is does it make a difference at all? Because when the RBI was sending some signal the market clearly did not react, they blamed it on monetary transmission or a whole of lot of other things. The fact is that monetary transmission in the Indian situation is never 100%, it is never a one to one and today when the markets are leading this, does it really matter what the RBI’s repo rate is? Does the central bank really count at all apart from which is investment being held back because of interest rate?

I think investment has been held back because there is virtually no certainty about how the Indian economy is going to perform and until this excess capacity is utilised, until private corporates feel confident about investment, they are not going to invest whatever the RBI’s repo rate is or is that too extreme a view?

Amandeep Chopra: You are right. A lot of those counts as far as the macro picture is concerned but I think the markets are focussed more on near term events and in the past whenever the 10-year has actually breached the overnight repo rate, we have seen a series of rate cuts from central bank. But the markets have always run a little ahead of the actual movement by the central bank.

So you are right. The 10-year where it is today at 6.15 does indicate at least three rate cuts from RBI. Now when the rate cuts do take place, do not expect the yields to rally further because they really have in a way discounted those moves. I think what is really important going forward essentially is how the banks really react to the deposit build up. If they really do pass through fairly large part of this deposit growth and you have seen some bulk deposit rates come down very recently, if that really does trickle down into the MCLR cut then I think you will actually see the real transmission driven more by liquidity infusion into the system rather than the rate cuts.

Mythili Bhusnurmath: Absolutely. That is quite possible but when your interest rate is cut in India and cut quite aggressively, even as the US Fed raises its interest rate, the interest rate differential between India and US comes down and you already have a flight to save haven. Donald Trump has promised to make US great again and he is going to do marvels for the US economy, so he says. In this case, you will find FPI selling out. How much of an impact will that make on the sentiment because the market is certainly driven much more by sentiment than by macroeconomic fundamentals?

Amandeep Chopra: If there is one big worry that we do have in spite of the sharp rally that we have seen so far, is clearly on the US and the impact that US has had on rest of the markets. It is very tough to imagine India being sort of decoupled to the extent that we have seen over last one month where currencies across the world have fallen much more where local onshore yields have actually moved up in expectation of much more hawkish Fed. In India, on the other hand, we have moved in the opposite direction. So there clearly is a floor to which Indian markets can sort of rally.

Again, given the timing of RBI and Fed meets, from Fed’s perspective, the markets have more or less discounted certain rate hike of 25 bps. That is a given. It is unlikely that there is an expectation or anybody really feels that the Fed will be tightening much more than that.

What really will be important will be the commentary that they gave and obviously the dot plot that points towards what the terminal rate is by end of 2017. There is a possibility that they may actually up it a little bit so against two rate hikes, it may be three rate hikes over the next calendar which in my view possibly could sort of stem any exuberance or any expectations of an aggressive rate cut from RBI going forward. But I think December clearly, markets are looking at anything between 25 to 50 bps simply because of the slowdown which I think we will see in Indian economy over the next two quarters which RBI will have to try and offset through some bit of easing.

Mythili Bhusnurmath: And if and when the FPIs do sell off as there seemed to be a clear indication that they will, what do you think the impact will be on the rupee and how will that impact the larger Indian macroeconomy because if you see a dramatic weakening of the rupee, that could have dramatic consequences, fortunately of course oil is not very expensive at the moment, so that in some way cushions us but a dramatic fall in the rupee could create mayhem in the market.

Amandeep Chopra: True. I mean if rupee were to really fall dramatically, then clearly the central bank will have to sort of step down or tone their monetary easing. But again the flip side there is if you do really see fair amount of currency depreciation even from here on, I think the central bank has intervened in the past, can intervene to a certain extent. Will we see a blowout, I think the Indian macro is a lot better this time around than 2013, so I would not draw too many sort of inferences from that period. The second part I think what you mentioned about FPI selling, we have seen about 2.4 odd billion dollars of FPI selling on a month to date and quarter to date basis, this could possibly be year end positioning.

Are we going to see a big outflow? The interest rate differentials still are not so bad. They have clearly narrowed down. What really matters is what are the 10-year yields and the Fed rate that you are looking at by December end? Again since domestic liquidity is in surplus, traders and investors are very bullish on local yields. This supply has really not mattered. So any additional supply from FPI if it is to the tune of another $2.5 odd billion may not spook the markets.