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Mar 26, 2013, 12.01 PM IST | Source: CNBC-TV18

Yields to range around 7.85-8%; see OMO in April: StanChart

Ananth Narayan, co-head of Wholesale Bank, South Asia, Standard Chartered Bank believes yields are likely to remain in the range of 7.85 to 8 percent. He also expects the RBI to continue open market operations (OMOs) in April.

Ananth Narayan

Co-Head of Wholesale Banking- South Asia

More about the Expert...

Bond auctions begin in the first week of April and Ananth Narayan, co-head of Wholesale Bank, South Asia, Standard Chartered Bank believes yields are likely to remain in the range of 7.85 to 8 percent. He also expects the RBI to continue open market operations (OMOs) in April.

Narayan further added, "As a base case, given the drop in core inflation, given the actual slowdown not just in investments but also in consumption now, I think there is a case to be made for softer monetary policy going forward. I think liquidity will be okay. To that extent, I expect 7.85 percent to continue in the short run."

Also read: India eases rules for FIIs in govt, corporate bonds

Besides that, Narayan is hopeful of seeing the same level of open market operations (OMOs) next year as was noticed in FY13. He also told CNBC-TV18 that the removal of FII debt investment limit is a positive for the yield curve.

Going forward, Narayan feels bond markets will continue to expect around 25 to 50 basis point cuts from the central bank. Meanwhile, Indian exports are likely to improve in the current fiscal, he noted, boosted by the US private sector.

Narayan also believes the Indian rupee is likely to hover around the 53 to 56 per dollar range.

Here is the edited transcript of the interview on CNBC-TV18.

Q: Is everyone talking about eight percent on the yield now? Is that a given?

A: We almost reached there and we weren’t really far away from eight percent. We remain in the range of 7.85 to 8 percent or so. The auction calendar for April in the new fiscal doesn’t look very daunting. It is just three auctions. The next year as well we should see open market operations (OMO) continuing.

On that basis, it shouldn’t be difficult for the auction program to go through. Having said that, clearly as April progresses, people will start concentrating on what the expectations from RBI are. The last policy didn’t indicate that RBI was looking at too many cuts going forward. That would be a big question mark.

 Having said that, as a base case given the drop in core inflation, given the actual slowdown not just in investments but also in consumption now, I think there is a case to be made for softer monetary policy going forward. I think liquidity will be okay. To that extent, I expect 7.85 percent to continue in the short run.

Q: How generous do you think the RBI’s OMO program will be given the point you made about the auction calendar not being too daunting?

A: The reality is we do need decent sized OMOs like we saw in this fiscal to continue in the next fiscal as well for the bond markets to behave themselves. This year we saw about Rs 1.25 lakh crore of OMOs. The next year, our estimation is that the total OMOs would be of a similar size, essentially because of reasons like currency leakage which will be roughly the same as this year.

Secondly, you also have the RBI earning a lot of coupon interest from the Government of India, given its large holding of government bonds. Merely to neutralise that, we should see the RBI going ahead with more OMOs like the last fiscal. Hence, taking the base case, we expect the auction calendar to be manageable, OMOs to continue and therefore bond markets to behave themselves.

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