See 10-yr yield range at 8.25-8.50% in FY11: IndusInd Bk

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » RELATED NEWS Expect more shocks in April from RBI: Experts Will RBI's policy rate hike impact corporates, borrowers? IndusInd Bank BSE | NSE 10/02/12 Are Mutual Funds betting on IndusInd Bank?

In an interview with CNBC-TV18, Moses Harding, Executive Vice President & HD Wholesale Banking Group, IndusInd Bank gave his view on the recent surprise rate hike and its ramifications on the bond markets.

Below is a verbatim transcript of the interview. Also watch the video. 

Q: The market seems to have completely ignored it and in fact this morning there was a bit of knee-jerk reaction but then we have come back. What is your take?

A: The fundamental factors both on the economy and monetary side are very clear. There is a need to balance growth and inflation. The growth outlook is positive. While the inflation outlook is negative in the near-term, expectations beyond July is for a soft landing. Also, the market expected RBI to trigger rate hikes post squeezing the liquidity because rate hike with abundant liquidity in the system may not give the desired effect.
 
We have seen liquidity squeeze with reverse repo counter flow close to zero. In my view the trigger for RBI pre-poning its rate hike, from April 20 to today in two phases, probably 0.25% now and 0.25% on April 20, is mainly on markets over reaction to Federal Open Market Committee (FOMC)'s stance that they are going to pursue zero interest rates regime for an extended period of time. So this market read it as RBI might delay the rate hike action.

Given the fundamentals of expecting 1-1.25 % hike through FY11, I think 0.50% has already been discounted which has seen 10-year yield from 7.5% to 8%. So the RBI would have been comfortable keeping the 10-year between 7.90% and 8.15% till the rate hike actions kick in.

So the overreaction to 7.80% on the 10- year and sudden fall in the overnight indexed swap (OIS) rates on one-year table has caused the trigger although there is immediate need to address the inflationary concerns.

Q: What do you expect the RBI will do in April in that case?

A: In April, if 10-year yield is around 8%, I look for a 0.25% hike in the policy rate. If market pushes the 10-year yield back to 7.70-7.85%-I look for 0.50% hike 

Q: But By April 20, we probably would have done two borrowing programmes. Will that not by itself take the yield to above 8%?

A: I will put a 7.90-8.15% range till July to September and then probably shift to 8-8.25% on next 0.50% rate hike trigger sometime in September. And 8.25-8.50% as the final phase when the final rate cut happens.

So, 8.25 to 8.50 % is the peak that I see during FY11 and that should be a good investment opportunity for strategic investors and I see a turnaround from March- June 2012 onwards into a soft interest rate cycle. 

Q: When do you think that banks will actually start charging higher in terms of a higher PLR or in terms of higher home loan without touching PLR- when does the real economy start feeling the pinch?

A: The borrowers have enjoyed a lower interest rate regime for extended period of time and a pass of 0.50-1% to the borrowers may not hurt them too much.

Q: When will it happen you think?

A: The shorter end curve will move up immediately tracking the 0.25-0.50% hike in overnight LIBOR. I see a liquidity squeeze staying in for extended period of time as the borrowing programme kicks in. I look at a 0.25% to 0.50% move till July and another 0.50% between July to December.