Probably not. That's because the currency is being driven by sentiment, which is seldom long lasting. The present conditions do warrant concern, as low interest rates means that investors will not find India attractive. Given that the rates are going up in other western countries on the back of a perceived revival in the economy, they appear more attractive investment destinations. It could also mean that we are missing the boat on this side of the channel.
The fundamentals, too, look less strong today. Growth will slow down, thanks to the lockdowns. Exports may not rise as imports will. Therefore, the current account deficit (CAD) will widen and could reach 1-1.5 per cent of gross domestic product (GDP). Foreign portfolio investors (FPIs) may no longer provide succour and while foreign direct investment (FDI) will continue; external commercial borrowings (ECBs) will not until such time the investment cycle turns around.
So, the rupee
will be in suspended animation for some time. While a value of Rs 74-74.5/$ looks fair, one can never tell. The RBI may have to intervene if the rupee crosses the 75 mark and edges upwards. But this can be taken to be more transient than a permanent shock.
How about bonds?
With the surge in liquidity which is being topped at the brim with GSAPs, yields will remain low as bond prices inch upwards. This seems to be the unintended consequences of trying to stabilise yields which has led to bond prices going up.
The 10-year bond, which was expected to cross 6.5 per cent under unchanged liquidity conditions during the course of the year, has actually come to the 6 per cent level on Monday - almost 12-14 basis points (bps) lower than at the time of the policy announcement. After the first GSAP transaction, there could be a further dip to less than 6 per cent. The market is finding it difficult to digest all these changes, but the government comes out as a winner as the borrowings will be at a low cost.
A worry will be inflation, which will continue to be in the 5-6 per cent range, as food prices have gone up and global prices firmed up. The assurance given by the RBI that while inflation is being targeted, the monetary arm movement will be towards being accommodative until such time growth looks sustainable is a signal of unchanged repo rate. This is good for bonds, though not so for the currency.
This is an unusual position to be with as normally a falling currency should go with higher interest rates. But this time it is not so, which is why we can expect more volatility in currency for another week or so even while the bond yields remain stable in downward direction.
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