Indian fixed-income and foreign-exchange markets are unlikely to see any major fallout after the collapse of a U.S. lender dented risk sentiment, a senior treasury executive at DBS Bank said on Tuesday.
“We generally have an FX fallout if there is a change based on any country-specific nuances,” said Ashhish Vaidya, managing director and head – treasury & markets at DBS Bank India.
“The dollar index is not stretching as the typical risk-off scenario. Unless commercial activity drops across the world, which does not seem to be the case, we may not see any major impact.”
The U.S. banking regulators said depositors at Silicon Valley Bank (SVB), which shuttered on Friday, would have access to their funds, easing fears that startups would struggle to pay their employees this week.
The bank’s closure had followed interest rate hikes that hurt its startup customers and a failed capital raise attempt, which led to cash withdrawals.
U.S. yields plunged, led by the two-year part of the curve, as expectations of interest rate hikes from the Federal Reserve went from aggressive to a much-smaller 25-basis points hike, with some also expecting status quo.
“We may even see similar expectations getting built in for Indian rates. As a base case, we expect an outside chance of a 25-bps hike in April, but nothing beyond that,” Vaidya said.
The odds of a 50-bps hike by the Fed had jumped after their remarks on inflation last week. That had also led to some worries over the Reserve Bank of India’s (RBI) terminal repo rate.
The RBI has hiked rates by 250 bps this financial year to 6.50%.
Vaidya expects the benchmark 10-year bond yield to trade in the 7.25%-7.50% range in the near term, with the focus returning to demand-supply and inflation dynamics.
“The sell-off in bonds that was supposed to happen is already done … If we look at (the time frame of) a couple of years, then we are near peak rates. On a longer-term basis, these would be peakish rates.”
Vaidya expects the Indian currency to appreciate to around 78-79 per dollar in the next 12 to 18 months, thanks to the improving trade deficit.
The rupee was at 82.49 on Tuesday and was marginally higher for 2023.
“Structurally, exports are picking up and imports will start coming off. The trade deficit picture would be better,” Vaidya added.
“If (foreign) money returns, then we can look at strengthening of the rupee in a serious manner.”
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