With inflation data in line with market expectations, Dhawal Dalal of DSP BlackRock Investment Managers believes that the Reseve Bank of India will introduce a rate cut in its forthcoming policy meeting.
Unless the central bank surprises the market participants with a larger than expected rate cut, Dalal feels that the benchmark 10 year is unlikely to go below 8.45%. According to him, it will probably remain in a range of 8.45-8.60% in the near-term.
Below is an edited transcript of Dalal's interview on CNBC-TV18. Also watch the attached video.
Q: How are you reading the inflation data? Does it increase hopes of a rate cut tomorrow?
A: I think the inflation number has been pretty much in line with what market was anticipating. This reinforces the belief that this is the golden window for the RBI to introduce a rate cut tomorrow. After that, further rate cuts will be dependent on the systemic liquidity, current account deficit as well as global oil prices.
Q: What is the movement of the bond prices that you expect tomorrow when the expected rate cut materializes?
A: We expect the government bond prices to remain range bound with a downward bias after the credit policy as the market participants will start focusing on the impending supply, which is on average about Rs 15,000-18,000 crore a week. Given the fact that the bonds have done extremely well from the peak yields of around 8.75%, the benchmark 10 year yield has come down all the way to around 8.45%.
I think from 8.45% there is a very strong technical resistance for the bond yields to fall further. Unless the Reserve Bank of India surprises the market participants with a larger than expected rate cut, we find that the benchmark 10 year is unlikely to go below 8.45%. I think it will probably remain in a range between 8.45-8.60% in the near-term.
Q: Does that mean it will remain at 8.45% even if a rate cut comes?
A: For the moment, it could probably trade slightly below 8.45%. But in my opinion, 8.45% appears to be a good support from a technical perspective.
Q: What do you expect to hear on the CRR front because there has been some mixed opinion? Most of the economists we spoke to are not expecting a cut, but some bankers like SBI believe that the right tool for the RBI to use would be another CRR cut?
A: Yes, some of the market participants do expect the RBI to announce a CRR cut. But given the kind of improvement in the systemic liquidity in April month-to-date as compared to March, we believe that RBI should probably hold onto CRR cut for later dates.