Latest RBI measures non-event for fixed income mkt: Nomura

Neeraj Gambhir, Managing Director & Co-Head, Fixed Income, Nomura India tells CNBC-TV18 that the extra limit of USD 5 billion on government securities will take some time to be exhausted. According to him, it might take somewhere between two to three months.

The fixed income and money market have not reacted to the RBI's action and Gambhir believes it is more of a non-event for the fixed income markets.

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q: Your thoughts on how quickly and easily the USD 5 billion extra limit on government securities which was allowed yesterday will get exhausted?

A: I think it will take some time. I think there is some headroom available on the existing 5 year limit as well which was auctioned recently and this is the new one so it will take some time. Plus there is the positive thing. They have reduced the maturity from 5 years to 3 years and that's a good thing.

We also have a new 5 year bond which is coming up for auction. That may have some interest. But the key challenge here is that it's still a longer term - one of the expectations which was around the withholding tax is still an outstanding issue.

Given all of these things and given the fact that SEBI will have to auction these limits and then people will get some time to invest in these limits, all these put together might take anywhere between 2-3 months time for utilizing these limits.

Q: In the near term do you expect to see any big impact on the benchmark bond yield then because what it read like yesterday was essentially a housekeeping exercise by the RBI (Reserve Bank of India) with particular focus on the currency?

A: That is true. I think money markets and fixed income markets have not reacted either ways to these announcements. I don't think there is a substantial impact on liquidity also. So, from a fixed income perspective, it is quite a non-event.

From a fixed income perspective, there were auction announcements yesterday. The whole issue around whether OMOs (Open Market Operations) continue in the next month when the liquidity is expected to become slightly more normal and less of a string. Those are the issues that the markets are focused on right now, rather than exactly the measures that were announced yesterday.

Q: In fact they also talked about a separate lending window for OMCs (Oil marketing companies) and that's also caused some concern about whether or not they will be as active with their OMO operations as they have been. Do you expect that to actually clamp down on sentiment in the bond market rather than being elevated?

A: If you look at our 10 year yields, there is a bit of suppression in the yields because of the OMOs. OMOs have kept while they are ostensibly a liquidity management tool. There is obviously an impact of these OMOs on the yield levels as well. So there is a bit of positive impact of these OMO auctions that happen every week.

If there was a discontinuity to them, then the market will react and most likely the market will react negatively. You could see some pressure on the yields coming in if the OMOs were not to take out the supply.

Q: For now, do you see the new benchmark yield anchored around this 8% level give or take 5-10 bps?

A: From a directional stand point I think it should be there. There is a bit of a technical issue around the new 10 year benchmark. It is like too less supply and its probably trading a bit rich on the curve.

Once the new 5 year comes in and you have 2-3 more bonds to trade, then there could be some give away. But, I think from a directional stand point there doesn't seem to be anything in the market to change the broad range of the market.