We still expect a rate cut only by Q4 of the current financial year: B Prasanna

Interview with MD & CEO, ICICI Securities Primary Dealership

The government today said it would stick to its target of borrowing Rs 5.7 lakh crore from the market this financial year. B Prasanna, managing director and chief executive officer at ICICI Securities Primary Dealership, says bond markets will be relieved as concerns of heavy supply have faded. He shares his views on what lies ahead for markets in an interview with Neelasri Barman and Parnika Sokhi. Edited excerpts:

The government has kept its promise on the market borrowing target. Your reaction on the new borrowing calendar?
Though we expect a slippage on the fiscal deficit, we never expected that to lead to a higher dated borrowing programme for the whole year. It was in any case too early for them to come to a conclusion on the deficit, especially with reforms being announced. This also gives us confidence that the government is aware of its responsibilities towards the market and is conscious of the signals that it sends. All said, it is a positive development and the markets will be relieved. Now, markets need to think of it as a pure play on rates vis-a-vis expectations than one of supply shock. Some of the expectations on collections from 2G auction and disinvestment sound too aggressive, though.

How do you expect the gilt yields to react on the announcement?
I think the market will gap up by 20 to 30 paisa tomorrow and the range might shift lower from 8.15-8.25 per cent to now 8.05-8.20 per cent. I think sustainability of lower yields will happen only in the eventuality of inflation coming lower and as expectations of an imminent cut gets crystallised. As of now, we still expect a rate cut only by the fourth quarter of the current financial year.

What is your reading of liquidity? Do you expect any liquidity easing measures?
Currently, the liquidity deficit in the system is about Rs 70,000 crore. Over the next five-six months, we expect currency leakage of Rs 80,000-90,000 crore due to festive demand. Also, in the November-December period this year, we have two important states going for elections. So typically during such time, there is a lot of currency withdrawals. If we add on to the current deficit, it may go up to Rs 1.4 lakh crore. There are some positive flows also. We are expecting OMOs (open market operations) of about Rs 80,000-90,000 crore which is to offset the currency leakage. I expect OMOs to start from mid-November. Hence, liquidity will be maintained in the range of Rs 60,000-70,000 crore.

Is there room for further reduction in cash reserve ratio (CRR)?
Any liquidity inflow from reduction in CRR reduces the amount that can be infused in the form of OMOs to that extent. CRR is already at 4.5 per cent, while the long-term target is at three per cent. It’s not very safe for us to go very close to the long-term target, because we need to use CRR as a shock absorber in case there is a need to infuse quick liquidity. Moreover, bond markets also prefer OMOs to CRR since the former has direct impact on yields.

Till what levels do you think the short-term rally of the rupee will extend?
The momentum is very strong for the equity and currency markets. I would assume we depreciated to such an extent that any small fillip in the momentum is going to drive good bit of returns. I would assume the rupee might go up to Rs 52 per dollar and at those levels I would assume we may again get into a fair bit of over-valuation territory because of high inflation and current account deficit. I would expect the rupee to stabilise either at that level or gradually weaken after it touched Rs 52 against the dollar.