INSUBCONTINENT EXCLUSIVE:
The central bank and the government announced steps last week to boost liquidity and support the rupeeIn July, Suyash Choudhary warned a
liquidity crisis is looming in India and funding costs for companies were set to soar.Now, as investors get to grips with a cash crunch made
worse by the debt crisis at a lender, Choudhary, the head of fixed-income funds at IDFC Asset Management Co., says the Reserve Bank of India
may go slow in adding to the two rate increases since June."Financial conditions have turned tight, and I think the RBI will have to pace
incremental tightening at this juncture," he said in an interview
"If they don't, it will risk financial stability and seriously hurt growth."India's authorities are already pulling out the stops to
ensure financial stability, with the central bank and the government taking steps last week to boost liquidity and support the rupee
Brokerages including Edelweiss Securities Ltd
and Nirmal Bang Equities Pvt
say that a more targeted approach to improving cash supply is needed as defaults by the ILFS Group have roiled sentiment and sent volatility
in the stock market to a seven-month high.The RBI may deliver two rate hikes by March-end, said Choudhary, even though one-year swap rates
are pricing in more than three back-to-back increases
The central bank has raised its policy rate by 50 basis points this year to 6.5 percent
Most economists in a Bloomberg survey are calling for a 25-basis point increase next week to stem inflationary pressure due to the sharp
decline in the rupee, Asia's worst-performing currency in 2018.The bond market, Choudhary said, is underpricing liquidity action from the
central bank, which he expects will buy at least one trillion rupees ($13.8 billion) of bonds by March end
The RBI has spent 500 billion rupees on debt purchases since April 1 to top up the liquidity sucked by advance tax payments and the central
bank's attempts to support the rupee.Liquidity RequirementOn Thursday, banks were allowed to dip further into statutory reserves to help
them meet their liquidity ratio requirement, a step that would boost cash available for lending."The action on liquidity coverage ratio is
consistent with our view that the RBI will push against incremental tightening in financial conditions," Choudhary said.IDFC Asset prefers
sovereign papers maturing in five years and AAA corporate bonds as the "best trades to play the fade in excess tightening expectations that
are being built in," Choudhary said
He is cautious on lower-rated and high-carry strategies as the ILFS crisis has led to a spike in short-term rates and begun to stress
financing plans.For instance, yields on one-year debt of top-rated firms rose 27 basis points in September to 8.72 percent, the most since
And three companies pulled 58 billion rupees of debt sales in September, the most in at least a decade.Given the backdrop, raising borrowing
costs further may not help stem declines in the rupee, according to Nomura."With currency weakness largely driven by global factors and the
real rate cushion already quite high in India, monetary tightening is not necessarily an effective instrument for limiting currency
depreciation, analysts at Nomura wrote in a note.Below are key economic events due next week:Monday, Oct
1: Japan Tankan index, South Korea trade, manufacturing PMIs across Asia, Thailand CPI, Indonesia CPI Tuesday, Oct
2: South Korea industrial production, Australia rate decision, Sri Lanka rate decision Wednesday, Oct 3: Australia building approvals, Japan
services PMI Thursday, Oct
4: Australia trade balance Friday, Oct
5: Philippines CPI, Australia CPI, India rate decision, Taiwan CPI(Except for the headline, this story has not been edited by
TheIndianSubcontinent staff and is published from a syndicated feed.)
