RBI likely to hold rates till December: BofA-ML

The Reserve Bank of India (RBI) is likely to be in a "break" mode till December, as increasing El Nino risks intimidate the downpour, a Bank of America Merrill Lynch (BofA-ML) statement said.
According to the global financial services major, price increases pressures are likely to linger as a possible El Nino could involve the downpour, which in turn would thrust up food prices.

Will the Fed start its famed taper in September?

 
64% of 800 investors polled think it will start this week but weak US data suggest it might not be aggressive.
Two big events this week - the Federal Open Market Committee (FOMC) meeting on Wednesday and RBI's policy review on Friday - will determine which way equity markets head.
Since June, the Federal Reserve has been looking to taper its $85 billion a month bond buying programme. The FOMC's meeting is crucial for emerging markets like India because over the last few years, financial markets have been fuelled by easy liquidity.

Since 2009, $100 billion has flowed into Indian equities. Not surprising, then, that the talk of a possible taper from this month has sent risk assets and commodities into a tailspin.
So, are the taper related fears unfounded or are they real? To begin with, markets have already priced in some tapering from this month. However, if the Fed tapers its bond buying by $10 billion, the impact on financial markets would be negligible.
But if it is higher than $10 billion, markets may roil. According to a Barclays survey, conducted among 800 global investors, 64 per cent of respondents believe tapering will start this week and almost all of them expect it to occur before the end of the year.

Investors now perceive the removal of Fed stimulus will start earlier, the survey says. Forty five per cent expect the Fed to finish their open-ended QE3 programme in second quarter of 2014, while most respondents in our June survey thought it would happen in the fourth quarter of 2014 or later.

Interestingly, most investors believe equities have become less attractive but have shown a slight increase in their preference for emerging markets and commodities from June.

Barclays says: "The perception of key risks has also shifted. Last quarter, a reduction in Fed policy stimulus was seen as the key risk for markets by nearly 40 per cent of survey participants; today, the number is just 26 per cent."
Several economists in the US believe concerns regarding a taper could be premature, as growth data continues to be weak and the Fed does not want "risk off" trades just yet.
Talks of a taper have pushed up interest rates in the US by over 100 basis points and any further increase would impact growth. For starters, it is believed growth has slowed in the third quarter (ended September) from the 2.5 per cent seen in the second quarter. Economic growth bottomed out in the fourth quarter of 2012 when it touched 0.1 per cent. While there is no doubt that growth is picking up, questions remain on how sustainable this would be without the stimulus.

Since the Fed met at the end of July, there have been 21 growth-related data releases. Of the 21 releases, 12 have been below consensus.

New home sales in the US in the month of July have fallen by 13.4 per cent. Bank of America Merrill Lynch says it's a close call but it is still in the December camp when it comes to the Fed's possible tapering.

Rupee could touch 75/USD: BofA-ML

The Reserve Bank of India (RBI) will have to take far more pro-active steps to rebuild forex reserves, because if the status quo remains, rupee could touch 75 per US dollar by the end of 2014, Bank of America Merrill Lynch said in a report. According to the global financial services firm, the collapse of rupee is likely "overdone" but that said "INR expectations are racing to Rs 70/USD (and now, even Rs 75/USD)." If the status quo remains, BofA-ML said  "a conservative estimate is USD/INR goes to 70 year-end and 75 by-end 2014 based on NDF forward pricing." NDF deals are forward transactions settled in dollars because the rupee, being a non-convertible currency, cannot be 'delivered' outside India.
The rupee on Wednesday had collapsed to a lifetime low of 68.85 against the dollar and closed at 68.80, registering its biggest single-day loss of 256 paise, as global oil prices jumped, deepening concerns about the current account deficit and capital outflows.
The rupee today however, recovered from its all-time low by rising 170 paise to 67.10 against the dollar in early trade on fresh selling of the US currency by exporters and banks amid fresh measures announced by the RBI to check free-fall of the currency.
RBI on Wednesday opened a special window to help the three state-owned oil marketing companies needing about $8.5 billion every month meet their daily foreign exchange requirement in a bid to check the rupee's free fall.
"We welcome yesterday's initiatives to provide RBI swaps to fund oil imports and seek swap lines against trade arrangements as short-term relief. Yet, to stabilise INR expectations, we believe that the Reserve Bank of India (RBI) will have to take far more pro-active steps to rebuild FX reserves," the report said.
The RBI should launch a scheme to attract significant forex inflows where the INR risk would be borne by the RBI to comfort investor confidence like issue of NRI or sovereign bonds or reviving FCNRA deposits.

"We ourselves estimate that the RBI would be hard pressed to sell $25 billion, and every US Dollar sold will likely only raise further questions about the adequacy of forex reserves," the report noted.