RBI may pause after another hike : Lakshmi Iyer

“We will see a lot of data dependency driving the next course of RBI actions. I mean the incremental data from the global front because from the previous policy to now, there has hardly been any material domestic adverse development which actually warrants tighter rates. Inflation has been pretty much on the bend,” says

Lakshmi Iyer, President, CIO-Debt & Head-Products, Kotak Mahindra AMC

RBI didn’t spring any big surprise and as expected, the interest rates were hiked by 50 bps rate. What is the way ahead?
Yes, the announcement was pretty much in line with most of our expectations and the undertone also where the market expected it to be a little bit negative but that did not happen. So, it had more of a neutral undertone.

Our sense is going forward, we will see a lot of data dependency driving the next course of RBI actions. What I mean by data dependency is the incremental data that is largely happening from the global front because from the previous policy to now, there has hardly been any material domestic adverse development which actually warrants tighter rates. Inflation has been pretty much on the bend.

That has been the narrative which the central bank articulated quite well today that while incrementally we are edging towards a slightly more neutral weight, there could be just one more rate hike before the pause that is going to be left to a larger extent on the incoming data.

Let us analyse this from a depreciating rupee point of view. That is really a bigger concern because as per the commentary, we again bank on a lot of data to come ahead and there was no specific level of weakness given per se. What do you have to say about the rupee trajectory going ahead?

My sense is that the rupee is not going to significantly be away from the rest of the currency pack. I am talking about both the emerging markets and the developed market currencies. The rupee has been a relatively better performer though almost every currency has actually depreciated versus the dollar.

Near term, there might be a small pullback if we see the dollar index displaying a little bit of weakness after having a pillar to pillar kind of strength. I think one goes back to fundamentals and the US Fed is in no mood to swap right now. Every time there is a sound bite coming from one of the Federal Reserve Governors, it is alluding to the fact that recession or slowdown does not really deter us from being inflation vigilant.

In that kind of a scenario, it looks like the broader emerging pack currencies could remain vulnerable in the very near to medium term and that means that it could pose reasonably strong headwinds even for the rupee. It is also important to see that the foreign exchange reserves have been dipping. They are still okay but it is important to have a plan B which we did not get to hear much on the policy front today.

I am pretty sure the policy makers are working out what more they can do in terms of their arsenal to combat the power of the dollar. I think that the outlook for the rupee at the current juncture seems to be a tad vulnerable.

Can you explain the reason behind the range-bound movement of bonds because we were expecting it to rise but a less-than-expected borrowing data came. What is the trend ahead?
The borrowing data means lesser supply in the second half of this financial years and that is certainly good news. Equally important is the potential dealing of the index inclusion. So for most market participants who are expecting it to be a slam dunk, it is going to be a little bit of more delayed gratification.

Plus we had an auction today the result of which came in a little bit higher. So towards the close of the market, we saw some selling in the 10-year bond which closed at around 7.4%. Going forward, this could edge towards the higher end. Of course a lot of it is the function of the US treasury which almost went up to 4% and is trending at around 3.7% right now. It is clearly evident that some more pressure on the bond yields can remain. It could be in a tight group for now but also could edge towards a 7.25-7.50 region and then try to play in that 15 to 20 bps zone.