Global investors are nervous ahead of the US Federal Reserve and the Bank of Japan’s policy reviews. While the speculation is that Fed is unlikely to hike rates on September 21, investors are betting on more stimulus from the BoJ. Speaking to BTVi, IPEplus Advisors CEO Anil Ahuja says both Fed and BoJ may maintain status quo.

Both Fed and Bank of Japan seem to be keeping investors little nervous. What’s your take on that?

I think the Fed is not going to do anything primarily because they don’t really have a good reason to do it. In addition, there is also the election coming up in the US. I don’t see any reason why they should create an event in the near future, which could potentially have an unsettling impact on the market. So there is no reason for them to do it. On the BoJ, I actually think this time it will do nothing because the efficacy of the easy money policy or negative rates in case of Japan is being questioned. Is it resulting in growth or inflation or both are up for debate. In that kind of situation, I think Haruhiko Kuroda is definitely coming under pressure from various people including the Prime Minister’s Office, which says that is this policy really working or should be held for some time. So my expectation for this week is little or no action at all.

I just wanted to focus on India’s interest rates. May be the issue is not related to Fed or BoJ. If the limit set by the RBI or by the Government in allowing foreigners to buy Indian debt is removed, India’s bond yield will fall by 200-300 basis points immediately because there is a massive demand. But foreign investors are not able to buy beyond a certain limit into the Indian markets. Are we artificially keeping interest rates high in India?

My thoughts on that are slightly different from what you just said. A very small sample of Indian paper also trades outside India, which is called the Masala bonds. Those papers are issued in a very limited quantity. This has just four issuers at this point in time. HDFC’s bonds, for example, trades in the 7.3-7.4 per cent band. You are not talking about 3 per cent or 4 per cent. Because it is a INR paper, it trades at that level. That is one aspect we need to keep in mind. That is really the fair value for Rupee paper in the international market as determined by market today.

There is a second piece to this puzzle also. If you are willing to buy 5-year paper of State Bank of India, you could probably get somewhere in the region of 2-2.5 per cent in the US dollar terms. Add to that, the implied Fx forward that you could gain by just selling the five year forward and if you many convert that into a Rupee paper, you would again come back to that 7 per cent plus number. So I think what needs to happen for that 200-300 basis point reduction is that genuinely the fear of rupee devaluation needs to evaporate, the interest rate differential between the two markets as we have created–the local market and the international market–that needs to change. And the RBI needs to start lending to the banks at a lower rate and the repo rate has to come down to 200 basis points. I don’t think the foreign money itself will flood in if rupee paper was giving 5 per cent. In fact, I don’t think any money will come in if Rupee paper is given 5 per cent.

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