MUTUAL FUNDS

10 year gsec yield to move back up to a range of 7.50% to 7.70% during the month of June<
13-Jun-13   18:25 Hrs IST

Mr. Ganti Murthy
In an interview with Capital Market, Ganti Murthy, Head - Fixed Income, Peerless Funds Management Co Ltd said, With the CAD at a level of 5% as against the budgeted figure of 3.5% due to high imports of oil and gold , the rupee had to fall. This coupled with the slowing GDP growth which resulted in lower exports led to more dollar outflow

Excerpts:

1. What explains the sudden fall in rupee against the dollar? The velocity of the fall has taken everyone by surprise. What is your outlook on rupee?

The Rupee has fallen in value against the dollar, sharply, in the past 1 month. The reasons are quite a few, some which are unique to India and some which are common with other emerging market currencies. The dollar has been rising in the past couple of months as reports of US Economy improving which prompted many FII's who are invested in the emerging markets to move out of emerging markets and invest back in the US economy. The immediate trigger which led to a currency fall across the markets was the rise in yields of US treasury Securities as investors moved out of safe assets like US Govt securities and into riskier assets like US stocks.

All the major Emerging Market currencies have fallen in value against the dollar. For example while the Rupee has fallen by about 8.38% since April 2013 , the Brazilian Real has fallen by 9.8% , the Philippine Peso by about 5% , the South Africa Rand by about 12.2% and the Russian Rouble by about 4.5%.

The features unique to India have been the consistently high Current Account Deficit. With the CAD at a level of 5% as against the budgeted figure of 3.5% due to high imports of oil and gold , the rupee had to fall. This coupled with the slowing GDP growth which resulted in lower exports led to more dollar outflow. This led to currency depreciation.

2. The one thing that the rupee depreciation does is it actually wanes out hopes of any rate cut. Do you still think that the RBI would go ahead and cut rates because this would dampen inflation as well?

The sharp fall in the Rupee has brushed away any possibility of a cut during the June policy meet. The currency fall would negate any fall in the domestic inflation. But we believe this to be a short term phenomenon.

3. What is your view on the short term rate movement?

Our expectation was that the yields would up from the lows which we have seen in May 2013. We expect the 10 year gsec yield to move back up to a range of 7.50% to 7.70% during the month of June.

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