Rupee may touch 59/dollar before elections: Bank of America

Indian stocks markets have rallied ahead of elections due by May. Foreign funds have been investing in Indian equities and bonds on hopes that a stable government post elections will lead to a turnaround in India's economic fortunes. Jayesh Mehta, managing director & Country Treasurer of Bank of America says the rupee may strengthen to 59-60 per dollar ahead of elections.

Here is an edited transcript of the interview with NDTV's Prashant Nair. (Watch the full interview here)

What did you make from what the Federal Reserve has said?

Before statement of US Federal Reserve Chair Janet Yellen, people were expecting a rate hike during third/fourth quarter of 2015, but after the current statement people believe that the rate hike could be in the first half of 2015. But it will be more data dependent. That is why all stock, currency and debt markets in USA reacted and global markets too.

What is going to happen here in India to currency and to bond yields?

India is going through a different sentiment altogether. People believe that the right government would be elected and there is a huge momentum on the equity flow which is getting reflected in the currency movement. Currency is just mirroring the equity inflow. Till the momentum continues on the equity side currency will be well supported. I won't be surprised if rupee goes to 59-60 level if the momentum continues more on equity side before election.

Equity market is moving on election hopes, are those hopes running too high?

I won't be surprised if some people would start taking profit before elections. In terms of election results nothing can be said right now. The markets are factoring 75-80 per cent probability that the right government would come in and therefore equities would rally and the flows would continue to come in to India through FIIs and that would lead to appreciation on currency. I think both of them are going together. But, the 10-15 per cent probability that if we don't get the right government and we get a fractured mandate then things can be really become mess.

The Met department has told us that there is a chance of weak El Nino. If that happens then what effect it will have on our Agricultural growth, what impact on GDP?

The entire Indian macro would take a year or year and half to change even if we get a right government. So, I think if the right government comes to power then the investors, especially the global investors will be willing to give a chance to the new government and therefore the momentum would continue. Nobody expects a magic that the new government will change things overnight. It will take a year, year and half to change the macros for which ever governments come into power.

What happens to inflation expectations?

On the CPI (retail inflation), one of the major factors is rural wages, and I think that is directly related/correlated with food prices. I think we are very soon nearing to the bottom of food inflation. The food inflation may rise up again and that would raise the core CPI too and that is little worrisome. But right now we expect that the March inflation would be little lower or flattish but then April, May would be very crucial.

What is your expectation on RBI on April 1?

I will go with the consensus that there would be no changes, no cut, no hike and status quo.

In terms of liquidity do you think the RBI to keep the market well supported?

Today, the Reserve Bank of India has announced the MSF (Marginal Standing Facility) window for five days till the year end. They are trying to provide as much liquidity which is required in the system on a macro basis. I think excess liquidity is what the market expects for and hopefully we expect the government to spend some Rs 75,000 to Rs 80,000 crore before the year end. And also the size of short term repo gets reduced, that is what we are looking for. But at least the negative liquidity of Rs2 lakh crore that is there in the system should come down to Rs 1 lakh crore at least.

In terms of flows, both in to equity and debt segments, do you expect the momentum to continue?

People are betting on the election results and there is a momentum for that and we hope that the strong flow would continue for some time till election. May be post-election would be a different scenario, either we have a very good momentum or we have a difficult situation. There may be profit booking in between but the momentum will continue till election.

What about bond yields, what would be the direction of bond yields from here onwards?

Bond yield has its own problem. Till April, it looks softer, flattish to little downward bias on bond yields. The 10 year bench mark, which is at 8.82 can go from 8.35 to 8.72. Most of the other bonds are at 9 plus and that should come down by end April. May, June, July typically has been a problem because of supply. Starting April first week, I think supply would be to the tune of Rs 15,000-Rs 18,000 crore every week. During May, June and July, there are no OMOs (open market operation) from RBI, so these months do not look too good for bond yields. But, post July I think bond yields should soften down.