Expecting 25 bps repo rate cut by RBI next week: Vivek Rajpal, Nomura India

We have a fairly constricted view on INR. From here on we will see a range bound INR market, says Vivek Rajpal, Nomura India.

Expecting RBI to cut rates by 25 bps: Nomura India
In a chat with ET Now, Vivek Rajpal, rates strategist, Nomura India, gives his outlook on RBI's credit policy next week and the rupee movement. Excerpts:

ET Now: What are you expecting from next week’s credit policy?

Vivek Rajpal: We are expecting 25 bps of repo rate cut and probably a cautious language from Reserve Bank of India.

ET Now: And CRR?

Vivek Rajpal: No, we are not expecting a CRR cut because according to our calculations, liquidity is comfortable. As we go ahead, we think liquidity will be comfortable for the next quarter or so. However, the only risk to the liquidity scenario is any RBI FX intervention. Otherwise, we think liquidity is comfortable and given CRR is already at 4.75%, we think from here on, RBI needs to cut repo rate rather than CRR.

ET Now: Last week you saw the bond yields spike to a four month high of 8.78%. They seem to have eased off considerably. Do you think that the bond markets have factored in a rate cut?

Vivek Rajpal: Yes. There are certain aspects as far as the backend of the curve is concerned. So there is of course the monetary policy expectation going into the credit policy on 17th April. Bond yields have rallied, so yes, one can say a 25 bps of rate cut is priced in.

However, the overall macroeconomic situation will also be important for the bond yields and probably bond markets will be very carefully watching the language that RBI uses in terms of forward guidance. So if we get a dovish language, bond yields can rally but looks like the first 25 bps of rate cut is already in the price.

ET Now: Pretty much everyone we speak to in the market believes that the rupee will most likely visit levels that we saw in November and that the RBI will intervene, which in turn is going to worsen the liquidity situation. Why do you believe it is not going to happen?

Vivek Rajpal: We have a fairly constricted view on INR. We think the move has already played out and from here on we will see a range bound INR market. Probably we will see a gradual appreciation. If I connect this logic with the liquidity infusion, we think the preferred tool of liquidity infusion would be open market operations rather than CRR because CRR is already at 4.75%, which is really low if one looks at it in the historical context.

So as far as liquidity angle is concerned, we think if the need arises, we think it will be very minimal rather than what we saw in November-December when we had a systemic risk off. So the liquidity infusion will be rather through open market operations because there will be a small liquidity infusion requirement rather than a big bang. Also, given the CRR levels are very low, probably that will not be the preferred tool.

ET Now: Volatility is a dominant factor in the currency market. In the long term, what is the range that you are looking at for the Indian rupee, given that we are already at a three month low?

Vivek Rajpal: We think the current levels should be held. We think 52 on the upside and 50 on the downside for next couple of months is very likely. If anything, it would rather breach 50 rather than 52.
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