Higher dollar and oil headwinds for Indian economy, says Sameer Goel

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Higher dollar and rising oil price are headwinds for Indian economy, said Sameer Goel, Head of Asia Macro Strategy at Deutsche Bank.

The Reserve Bank of India (RBI) on Friday announced it will purchase Rs 10,000 crore of government of India bonds of various maturities from two years to 15 years. This is the first purchase announced by the RBI this financial year. Sameer Goel assess the impact.

“I guess announcing an open market purchase is probably the most direct policy measure with relation to the technical in the market and to the extent that market would probably anticipate more of such open market purchases to be announced. You will probably see some bit of a relief here,” he said.

Edited Excerpts:

Do you think that after all these weapons, this one will work and yields will fall?

I guess, we all hope it would. As you said, they have tried a bit in the recent past including all the changes adjustments they have done to the Foreign Portfolio Investors (FPI) limits, but I guess announcing an open market purchase is probably the most direct policy measure with relation to the technicals in the market. To the extent that market would probably anticipate more of such open market purchases to be announced, you will probably see some bit of a relief there.

But let us not forget the significant headwinds in general from the macro environment. We can see what is happening with emerging markets more broadly in particular in relation to the dollar strength and I think that is going to continue to pose problems here for markets like India. Near-term for sure, this should act as some relief.

The dollar index is now at its 2018 peak, touching 93, do you see more pressure coming there and what could be the ramifications for India?

The dollar index has posted a pretty interesting level. After the NFP, you have probably seen a little bit of a sort of a pressure lower in the dollar. I don’t think it changes the broader picture. We are fundamentally looking at a point where the market is significantly under-pricing what the terminal picture on the Fed trajectory would be and to that extent given that there seems to have been this re-correlation between rate differentials and the currency and the dollar, we will probably see some bit more pressure higher up for the dollar in the near-term.

That will, specially given the key levels around which we are and including on the treasuries at around 3% level, I think emerging markets will keep being under some bit of a pressure here.

I wanted to ask you even about the upcoming Karnataka polls. The rupee is usually sensitive to these things, if there is a BJP victory, do you think the rupee will be able to weather this much more easily, the dollar strength? Can you give us both scenarios, if there is a BJP victory and there isn’t one?

I would prefer not to go into necessarily scenarios here, but what I would say is that there are multiple factors going into the currency at this point in time and I would argue, not just India specific, but obviously what is happening with the dollar environment overall and emerging markets.

To the extent that if it is a market friendly outcome and if equities were to like the outcome and as we know the currency is a lot more sensitive to what is happening with the equity markets than necessarily fixed income at this stage, I think if there was to be a market friendly outcome, that helps rupee being able to weather the dollar strength a little bit more successfully.

I should point out that for all the weakness we had seen in rupee, it is at best mid-beta to the bigger dollar move. If you take up a chart of all emerging market currency performance since the dollar started to strengthen from around middle of April, India is at best in the middle of the pack and probably slightly towards the better end of the pack, especially among its high yield emerging market peers.

So already the currency is doing relatively better than a lot of other equity market. I think the problem will remain, it will have to face particularly the higher dollar trend and were oil to continue to push higher towards $80 per barrel, those will be the very significant headwinds. Of course, a market friendly outcome on sort of the political front will certainly help buffer some of that implication.

Give us a word on the range, how much you think yields could fall in the very near-term?

I think it is hard to say as to how much this would be worth. The initial expectation would be this probably be worth of about 10 basis points and particularly, I would imagine for the front end, I don’t think the market gets immediately terribly enthused about taking up a lot of duration, but if you combine that together with the relaxation, they have done on FPI limits for the frontend, I would imagine the front of the curve probably gets a little bit more relief as a result of this measure but again beyond that, we cannot ignore the fact that we are still in global fixed income sort of at very key pivotal levels there.

Rupee? For the next two months or one month, what is the range?

I think the pressure to my mind to the extent that I think the dollar will probably be somewhat pressurised higher and given the other headwinds, which we have up ahead, I would imagine that we probably pressurise for dollar rupee more likely towards 67 rather than not.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow