The Reserve Bank of India Governor's hawkish statement that the situation in India was not conducive for a fiscal or monetary stimulus has dented mood in the bond market. Bond prices fell sharply and yields were rising 8.5% steadily.
Speaking about the impact on the bond market, which was rallying in hopes of a 25bps to 50 bps rate cut, Vivek Rajpal of Nomura India said the reaction was more of a positioning game.
Here is an edited transcript.
Q: What is your sense in terms of the reaction that the bond markets have seen at this point in time? If in case there is a disappointment on January 29 would you see further hardening or do you think it is factored in?
A: As far as the bond market reaction is concerned it is more of a positioning game. Everyone was long in the market and positioning was heavy and market was really discussing possibility of a 25 or 50 basis points cut. Now after the Governor's statement it is clear, he is hinting that an aggressive rate cut is not on the cards. So the market is now removing any chance of a 50 bps cut and with positioning very long across the market the kind of market reaction is on the expected lines.
Q: What are you expecting on January 29? What are you expecting upto April that is one, two, three policies?
A: On January 29 we were expecting 25 bps rate cut and that remains on card. However I must say until yesterday I was very hopeful on another 25 bps rate cut on March 15 but after hearing the Governor’s statement I am questioning my judgment on series of 25 bps of rate cuts. So 25 bps on January 29 remains on card and may be another 25 bps after sometime.
Q: No cash reserve ratio (CRR) on January 29 or thereafter?
A: I don’t think CRR is on their cards in the sense they are preferring open market operations to infuse liquidity. Anyways CRR has been reduced to 4.25 percent and from their post policy conference it looks like Open Market Operations (OMO) will remain their preferred liquidity infusion tool.
Q: Are you all expecting 75 bps for the full year 2013?
A: Our house view is 50 bps.
Q: So it is not much of a change from where you were even for the full year?
A: Yes not much change.
Q: What is the range that you see on the 10 year yield in the near term? Do you see it to be as volatile as it has been in terms of movements or do you expect it to stabilize considering that the market is possibly not factoring in a 50 bps now?
A: If we are talking about 7.75 as a repo rate probably bonds should stabilise around 7.90-7.95 percent or so levels. At the moment it is not about valuation, but about the positioning and because everyone is long on the market it is natural for market to interpret every news in a negative direction. So probably 7.90 percent is the zone around which market should stable.
Q: There was an expectation by lot of other bond market watchers that it could go down to considerable levels of around 7.8 to 7.75 percent may be later in the year possibly March-April onwards when inflation could also subside. At that point in time would you estimate levels on the 10 year at those levels? Until March 31 at least is 7.8 percent quite out of the window?
A: We had a target of 7.8 percent, which was met. 7.8 percent looks the lower end of the range in the near term.