Bank of America is positive on Reserve Bank's (RBI) measures and feels that it will shore up reserves and confidence among banks. But, this is only a breather and has to be followed up by bigger macro steps, says Jayesh Mehta, managing director & country treasurer at Bank of America. Raising money will take time and bond yields will reach sub eight percent levels over the next three months, he adds.
Also read: Raghuram Rajan arrives with a bang
Below is the edited transcript of his interview to CNBC-TV18.
Q: The impact that these moves by the Reserve Bank of India (RBI) would have on the currency and how sustainable would they be going ahead?
A: This is a very great move. If you look at all the earlier stance, the currency did stabilise post raising funds; tightening was a stopgap, but things will change only when you start raising funds.
The same thing happened in late 90s too. This window will generate good amount of money and that will definitely shore up confidence and reserves. We will see the impact on it. Of course, this is a breather so this has to be followed up by the macro changes. This gives three-four months time more to work on the macros to correct, which the ministry is working on.
Q: How will you look at the bond trading part? Could we see bond yields moving lower? Are you factoring in any hope of a change on September 20?
A: I think September 20 will depend on Fed moves. If the Fed thing is nasty, we may not change it immediately, but I look at it this way. It is not only helping the currency, even if you get USD 15-20 billion with both these schemes, but also has the local liquidity.
Therefore you see the rates going down and there will be lot of banks who may not even have large assets in India. But they will still try to bring that money in and therefore for them the choice is to go for the bonds.
Q: Where would yields go up until September 20 at least? You think yields could go to 8.1 percent or thereabouts if these banks are able to raise money?
A: Yes, but I do not think the impact will come that fast; maybe some foreign banks are little ahead of the curve. They may get in money before that, but whole lot of big money would take some time. If it comes before September 20, it is great but eventually we are looking at sub 8 levels in next three month situation.