Economy
‘FIIs to closely watch RBI intervention in dollar market’
Summary
- FIIs will keep an eye on the central bank's intervention in the forex market, according to Adarsh Sinha, head of Asia-Pacific, foreign exchange and rate strategy, Bank of America.
Foreign investors (FIIs) are unperturbed about the formation of a coalition government in India and will instead closely watch the intervention by the central bank in the forex market going forward, according to Adarsh Sinha, head of Asia-Pacific, foreign exchange and rate strategy, Bank of America.
Sinha believes that investors are more worried about external factors like the US Federal Reserve rate cut while determining their investment decisions.
Read | India poised for stronger growth over next decade amid AI, climate risks: RBI
US interest rates, RBI policies key focus
“I guess the biggest question we get asked is on US interest rates and the US dollar environment," said Sinha while speaking to Mint. "Is there a risk if US rates stay higher for longer? In my opinion, the Reserve Bank of India has done very well in keeping the volatility low in FX rate. The question is whether the central bank will change its strategy of keeping volatility very low. I think the general view is probably they will not, at least, till the time the current governor is in place, and he's here till the end of the year."
Read | MPC meeting: Inflation elephant hogs attention; interest rate change unlikely
Sinha, who had earlier predicted a rate cut by the Fed in June this year, has pushed his expectation of a rate cut to December. This is because he expects growth in the services sector to slow down later. Other economists are however expecting a cut in June or September.
“Yes, we are predicting December rate cut. I think July is very unlikely, because the Fed probably needs to see several months of inflation data, which means at least two, probably three months, which kind of takes the July meeting out of the equation. September is possible. They generally don't start the cycle very close to the election," he said.
Dividend payout by RBI
The recent announcement of a higher dividend payout of ₹2.1 trillion by the Reserve Bank of India has triggered the possibility of a sovereign rating upgrade. But Sinha is not very enthused about a revision in the outlook on India to positive from stable.
Also read | Sell sell? Why the market doesn’t like the poll results
"I don't think that they have a strong view on whether they upgrade or not, but it could happen. I'm not sure how much the rating upgrade makes a difference for FIIs, as FIIs are already observing the fiscal improvement, and the party is buying bonds on the back of that. So the rating upgrade is not like a big inflection where you would suddenly see people are buying because you are investment grade instead of junk," added Sinha.
With India set to be included in the JP Morgan bond index this month, expectations are that it will channel passive debt flows into India. Since the announcement of the bond inclusion, India has seen $11.7 billion worth of foreign investment net flows into the debt market. Analysts expect the long-awaited global bond inclusion to draw as much as $30 billion of FII flows into the country, resulting in the softening of G-sec yields. Sinha expects yields on the 10 year G-sec to hover around 7%, given that RBI also could start cutting rates this year.
Also this | Retail investors bullish ahead of exit poll, FIIs cautious
"Our forecast is at 7% by year end. At some point, RBI will start cutting rates as the fiscal outlook improves. The fiscal deficit projections are also getting revised. And then you have the bond inclusion inflows coming. But at the same time, unless there are large rate cuts, it's difficult for yields to come down a lot. So maybe it will be at 6.8-6.9%, but I think the downside from there would be limited," he added.
