Jun 18, 2013, 08.34 PM | Source: CNBC-TV18

Yields may come down post 2nd half of July: BofA

BofA's Jayesh Mehta believes that Federal Reserve's statments in its meeting starting tonight, will play a huge role on whether RBI will cut rates in its July monetary policy or not.

Jayesh Mehta

MD & Country Treasurer, Bank of America

Expertise : Currencies

More about the Expert...

Jayesh Mehta of Bank of America says the Federal Reserve's statements will play a huge role in the July rate cut decision of the Reserve Bank of India (RBI). The two-day FOMC meet starts tonight.

After the RBI maintained a status quo on its credit policy on Monday , analysts have been debating on the chances of a rate cut in July. Speaking to CNBC-TV18, Mehta says the Federal Reserve's two announcements before the July 30 rate cut will play a key role in the decision of the RBI. 

Meanwhile, he believes that selling-off by the foreign institutional investors in the debt market has come down in the past one week. He sees the 10-year government bond yields coming down in the second half of July. On currency front, Mehta believes that rupee will stay volatile and that is why people are running short positions on the Indian currency.

Below is the verbatim transcript of Jayesh Mehta's interview on CNBC-TV18

Q: At 7.25 percent, what is the 10-year bond yield currently pricing in? A rate cut or a no rate cut in the July policy?

A: Currently, the bond market is not really pricing anything, it has stabilised. On Monday also, the yields came down sharply, and it was mainly because of virtually very low positions with traders whatever the supply, either primary or whatever, has been sold by the foreign Institutional Investors (FIIs) has been absorbed well by the local banks in large ways in the past 15 days.

So at this juncture, it is not pricing either a rate cut or a rate hike. People are looking forward for a fair statement on Wednesday and after that people may take some call on whether rate cut in July will happen or not.

Q: There are a lot of people who don't think that July is ruled out. Where do you stand and therefore, how will the bond markets move with or without a rate cut?

A: Before our July policy we will have two Fed statements coming in, one on Wednesday and one in July. This whole month particularly till end of June as expected earlier, we will see volatility on both sides. Till yesterday, people were talking that maybe emerging market sell off is over and even if the tapering is going to happen it will happen sometime between September to November.

The rate hike in the US is not going to happen immediately, so maybe it is over sold situation. People were expecting that on June 19, Fed may be a bit dovish. Last night, we had some news editor giving out and people are again scared that Fed would be tapering it very soon. So this kind of situation is going to happen at least for sometime till people’s portfolio really get adjusted to a comfortable level till mid-July. So, we should see some stability coming in but in the second half of July, we would see bond yield coming lower. Hoping nothing dramatic really happens on the US side.

Q: What happened in the currency market on Monday? We saw the equity markets rally quite a bit but the rupee gave up its intraday gains and closed weak.

A: For rupee the same thing is happening. When the May 22 statement for the Fed came and before that the dollar was having a bit of strengthening against all currencies. Then the second axe fell on the emerging market and we did suffer with the emerging market as well. Since yesterday, the countries where the current account deficit (CAD) is higher, are getting hammered. So India, Brazil, South Africa are getting little hammered against dollar.

When you don't have any view, it is all dependent on how the Fed statements are going to be and so, at this juncture people are just looking at the technical. May be the previous 58.60-58.70, if it breaks, people may come to buy dollar more and that could accelerate the depreciation. As of now, it looks like it is holding up but it is going to be volatile. And that is the reason people are also running very light positions. There is hardly any risk in the market to that extent but we have to really watch out completely on Fed.

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