Market is factoring 100 bps hike by US Fed in 2022; RBI likely to hike rates by June or August: Ashhish Vaidya of DBS Bank India

Ashhish Vaidya, Head of Treasury, DBS Bank India said that the market is already pricing in a 100-bps hike in policy rates by US Fed. Hence the impact would depend on the aggressiveness of the hiking cycle.

Vaidya has an overall experience of 20 years in the banking industry. Prior to DBS, Ashhish headed fixed income, currency and commodities trading at UBS Investment Bank.

In an interview with Zeebiz's Kshitij Anand, Vaidya said that RBI would have the first hike in Repo Rate by 25 bps either in June or August policy, and we are likely to have repo at 4.50% by the year-end. Edited excerpts:

Q) It will be a tight rope walk for the government in the upcoming Budget 2022. What are your views on the fiscal deficit?

A) We expect a fiscal deficit of about 6.2-6.3% in the upcoming budget. We expect the Union Government to continue consolidating the borrowing on the balance sheet and maintaining realistic growth revenue projections.

The allocation to rural growth is likely to remain high, along with fertilizer subsidies. With the formalization of the economy and growth rebounding, we have seen the GST collection remaining buoyant this fiscal year, with July-Dec 2021 seeing avg of Rs 1.15 trillion per month.

We expect the GST revenue to remain strong in the coming year, with GST collection around Rs 1.20 trillion per month.

Q) What kind of divestment targets you are looking for in Budget 2022?

A) The disinvestment amount would depend on which year the LIC disinvestment is likely to happen. Assuming LIC disinvestment happens this year, we think the Union Government will maintain about Rs 80 trillion.

The broad expectation is that along with LIC disinvestment, the Government will keep disinvestment at 0.8% of GDP (total Rs 2 trillion).

Q) With the US Fed ready to raise rates in 2022 – what is the kind of policy direction RBI will follow?

A) We expect RBI to increase the Rupee liquidity absorption through larger amounts of VRRR and increase Reverse Repo Rate through Jan to Apr this year, thus taking overnight rates towards 4% from 3.35% currently.

RBI would have the first hike in Repo Rate by 25 bps in either June or August policy, and we are likely to have repo at 4.50% by the year-end.

However, we think that the RBI policy action will be gradual and may not see more than two hikes this year in Repo Rate.

Q) Clearly, bond markets might have a good 2022. What are your views on the bond markets in 2022?

A) We expect the yields to move higher, with 10-year inching towards 6.80%, as the market completely absorbs the reduced liquidity and higher policy rates to address the sticky high inflation in the first half of this year.

However, considering that RBI is unlikely to move into an aggressive tightening cycle and a strong possibility of index inclusion, we expect the investor demand to return in the second half of the year.

Q) Rupee remained in action ahead of the Budget – what is the kind of level you foresee for Indian currency in 2022?

A) We expect the pair to be range-bound for the initial part of the year with spot moving around 74.50 with a slight depreciating bias as India's current account deficit remains above USD 20 billion per month on the back of a high import bill.

However, we expect Capital account inflows to help manage the higher Balance of Payment. As we move through the year, it is likely to see that US Fed may not be able to raise rates at the pace expected by the market, and that is likely to create USD weakness globally, and that should help in INR appreciation in the second half of the year.

Q) Global crude oil prices are already inching towards $90/bbl. Do you think this could surpass $100/bbl this year?

A) The world is seeing economic activity return to pre-pandemic levels. The travel activity which has been restricted is likely to pick up as vaccination percentage continues to increase, and the impact of Covid mutations becomes milder.

The growing demand for energy is likely to increase this year. The climatic changes and the movement towards sustainability are further accentuating this demand increase.

For the moment, we do not expect shale gas production to cover the increased demand. Also, the geopolitical tensions seem to crop up too frequently in energy-rich areas. Hence, we expect global crude prices to move above USD 100 per barrel this year.

Q) If US Fed raises the rate by more than 100 bps – what is the kind of impact you see on currency, equity and bond markets?

A) The market is already pricing in a 100 bps hike in policy rates by US Fed. Hence the impact would depend on the aggressiveness of the hiking cycle.

In case FED was to front-load the hikes, one can expect USD strength with equity sell-off and flattening of the yield curve.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)