 "It is not going to make a difference to Indian debt: Jayesh Mehta")
The US Federal Reserve's decision to increase rates was in line with market expectations. Jayesh Mehta, managing director and country treasurer for India at Bank of America Merrill Lynch, spoke to Vishal Chhabria and Abhijit Lele on the implications of the Fed rate increase for Indian debt markets. Edited excerpts:
The US Fed raised the key policy rate by 25 basis points (bps), and spelt out a more accommodative stance. What does it mean for Indian money and bond markets?
The broad policy has been according to consensus view and the world market has not reacted with high volatility. From a global perspective, Indian bonds can go down further due to soft oil and commodities, which will also keep global inflation low but local factors like higher borrowing and higher supply of bonds, if not supported by other measures, might restrict the softening of rates.
Though the dot charts have not changed, because of this particular Fed statement "…realised and expected economic conditions, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments", the futures market is looking at Fed rate hike being less than 100 bps.
How prepared are the Reserve Bank of India and the markets for the aftermath of the Fed rate hike?
RBI is better prepared to manage any volatility after the rate hike. The comfortable foreign exchange reserves position gives us strength. Plus, outflows from foreign portfolio investors (FPI) have bottomed out. At present, the Indian rupee is fairly valued and is expected to move between 65 and 66 against the US dollar.
In the light of Fed rate hike, how will the churn in global market and rising yields impact Indian companies raising money abroad?
The borrowing by Indian companies from international market is not large. Most of them have good risk management practices (hedging exposures, nature hedge), especially the larger ones. So, Indian companies will not see major impact. But, we are not sure how the smaller companies are placed in terms of hedging. Hence, it is difficult to see the impact on them.
Now the focus would shift to how China deals with yuan, which is becoming part of IMF's statutory drawing rights. How will it play out?
China's articulation of intent to de-peg yuan from dollar and peg the Chinese currency to basket of currencies is fairly significant move. It also gives a peek into the way China would deal with currency related issues. Yuan has depreciated and if the Chinese government devalues it further, it might trigger currency wars (competitive devaluations). In that case, India will suffer and will have to loosen up to that extent; otherwise, exports and India Inc's earnings will suffer. RBI has in the past expressed unhappiness over such currency wars.
While emerging markets are bunched as a group, there is much variety in market conditions amongst them. Where does India stand and how do global investors look at us?
India stands out in the emerging market group. When there is a fall in prices of oil and commodities, the country has benefited. But, other emerging market countries dependent on commodity exports might find it difficult to manage their financials.
The flow of foreign money into Indian debt - sovereign paper and corporate bonds - has risen significantly. What is the outlook on FPI flows into Indian paper in 2016?
Indian debt at prevailing yields remains attractive. A 25-50 bps increase in Fed rates is not going to make a difference. The currency movement would have bearing on the flows into debt. FPIs want to invest more, but there is the issue of ceiling on exposure in government.
RBI has reduced the repo rate, indicating softening rate cycle. But, yield benchmark government bonds (10-year) have hardened after touching the 7.5 per cent levels. What is the trend likely in 2016?
They are currently moving in 7.73-7.85 per cent levels. The yields on the benchmark paper will soften further. I see them reaching 7.4 per cent level or below in the next five months.
The liquidity in the market became tight in November after a comfortable spell in the previous months. RBI infused funds by purchasing securities worth Rs 10,000 crore. Do you see more RBI action in 2016?
I see the central bank continuing with open market operations (OMO) to infuse liquidity, depending on market conditions. It might do OMO's worth Rs 30,000-40,000 crore before the close of current financial year.
There have been some improvement in India's macro indicators such as index of industrial production, etc. How do you see this trend?
There have been some green shoots, but it can't be called an 'economic recovery'. For a strong recovery, the government will have to chip in through higher public investments as companies are not in a position to drive the economy led by capex.
The US Fed raised the key policy rate by 25 basis points (bps), and spelt out a more accommodative stance. What does it mean for Indian money and bond markets?
The broad policy has been according to consensus view and the world market has not reacted with high volatility. From a global perspective, Indian bonds can go down further due to soft oil and commodities, which will also keep global inflation low but local factors like higher borrowing and higher supply of bonds, if not supported by other measures, might restrict the softening of rates.
More From This Section
Where do you see rates moving in the US in 2016?
Though the dot charts have not changed, because of this particular Fed statement "…realised and expected economic conditions, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments", the futures market is looking at Fed rate hike being less than 100 bps.
How prepared are the Reserve Bank of India and the markets for the aftermath of the Fed rate hike?
RBI is better prepared to manage any volatility after the rate hike. The comfortable foreign exchange reserves position gives us strength. Plus, outflows from foreign portfolio investors (FPI) have bottomed out. At present, the Indian rupee is fairly valued and is expected to move between 65 and 66 against the US dollar.
In the light of Fed rate hike, how will the churn in global market and rising yields impact Indian companies raising money abroad?
The borrowing by Indian companies from international market is not large. Most of them have good risk management practices (hedging exposures, nature hedge), especially the larger ones. So, Indian companies will not see major impact. But, we are not sure how the smaller companies are placed in terms of hedging. Hence, it is difficult to see the impact on them.
Now the focus would shift to how China deals with yuan, which is becoming part of IMF's statutory drawing rights. How will it play out?
China's articulation of intent to de-peg yuan from dollar and peg the Chinese currency to basket of currencies is fairly significant move. It also gives a peek into the way China would deal with currency related issues. Yuan has depreciated and if the Chinese government devalues it further, it might trigger currency wars (competitive devaluations). In that case, India will suffer and will have to loosen up to that extent; otherwise, exports and India Inc's earnings will suffer. RBI has in the past expressed unhappiness over such currency wars.
While emerging markets are bunched as a group, there is much variety in market conditions amongst them. Where does India stand and how do global investors look at us?
India stands out in the emerging market group. When there is a fall in prices of oil and commodities, the country has benefited. But, other emerging market countries dependent on commodity exports might find it difficult to manage their financials.
The flow of foreign money into Indian debt - sovereign paper and corporate bonds - has risen significantly. What is the outlook on FPI flows into Indian paper in 2016?
Indian debt at prevailing yields remains attractive. A 25-50 bps increase in Fed rates is not going to make a difference. The currency movement would have bearing on the flows into debt. FPIs want to invest more, but there is the issue of ceiling on exposure in government.
RBI has reduced the repo rate, indicating softening rate cycle. But, yield benchmark government bonds (10-year) have hardened after touching the 7.5 per cent levels. What is the trend likely in 2016?
They are currently moving in 7.73-7.85 per cent levels. The yields on the benchmark paper will soften further. I see them reaching 7.4 per cent level or below in the next five months.
The liquidity in the market became tight in November after a comfortable spell in the previous months. RBI infused funds by purchasing securities worth Rs 10,000 crore. Do you see more RBI action in 2016?
I see the central bank continuing with open market operations (OMO) to infuse liquidity, depending on market conditions. It might do OMO's worth Rs 30,000-40,000 crore before the close of current financial year.
There have been some improvement in India's macro indicators such as index of industrial production, etc. How do you see this trend?
There have been some green shoots, but it can't be called an 'economic recovery'. For a strong recovery, the government will have to chip in through higher public investments as companies are not in a position to drive the economy led by capex.