Interest rates have risen sharply since May. Are bonds looking better for FPIs (foreign portfolio investors)?
There were low FPI flows last year and so far, they have shown little interest. In the last fortnight we saw some FPI flows coming into debt, right now between Fully Accessible Route (FAR) and other limits, the utilisation is roughly ₹1.50 lakh crore. It’s all local markets right now. It would be a bonanza if the (global bond) index comes in. Now we’ll have to see how the new development on the withholding tax pans out. When it comes to FPIs in debt, since we are not part of a global index, we don’t attract too much of long-term funds. What we get is traders’ money, opportunity money or arbitrage money. And even in that, if you look at FPIs in debt, more than interest rate, it’s a forex play.
What does that translate into?
So, when you are bullish on the currency, the best way to go long the rupee is to buy bonds. The RBI tries to dampen volatility on both sides. Right now, we are not seeing significant appreciation. If you look at our current account deficit, it’s improving dramatically. India’s growth story looks very good so we should look at the rupee appreciating over time. Next year, most economists forecast the current account deficit at 1.8% of GDP. Global client centre services are growing tremendously. Over the next one year, the rupee will appreciate. The consensus is around 81 to a dollar. I won’t be surprised if it goes below 80. I feel we could go to 78 in the next 1-1½ years. But before that, can it go to 83 again? Maybe, because May-June-July is when you have big outflows generally.
Government borrowing was smooth last year. How about this year when liquidity is tighter? Would the RBI have a role?
I do think the RBI will have to step in through open market operations in the second half of the financial year, not only for the purpose of buying bonds but also for liquidity. The government is starting a fresh borrowing programme and we expect the 10-year benchmark to be in a 20-30 basis points range. Eventually, it will anchor at 7.20-7.30% levels and if there is good news, it can even touch 7%.
