Bullish Barclays Cap sees 10-year yield at 7.75% by Dec-end

However, Siddhartha Sanyal of Barclays Capital is very bullish on Indian bonds. In fact, he expects benchmark yield to touch 7.75% by December this year and has a target of 7.5 percent by March 2013.

Below is the edited transcript of Sanyal’s interview with CNBC-TV18.

Q: What makes you bullish on Indian Bonds?

A: If you see very near term, you might not see magic in the next 1-2 weeks, but if you give this market a little bit of time possibly you have something more in store for you. The growth worries are pretty much on the rise and we keep expecting policy support not immediately in the form of repo rate cuts.

In the very near term, it can be in the form of some kind of liquidity support, but eventually from the next quarter onwards, it can be in the form of repo rate cuts as well. As such you have policy support in the form of liquidity as well as in the form of policy rate cut over the course of the next six months. Inflation by that time will start looking a little softer.

Q: Do you see the yields responding at all to OMOs or CRR cuts which might be getting translated through the banking system in terms of lower lending rates but do you see the bench mark bonds responding to any of these liquidity measures?

A: There is always a game of demand and supply. As of now, the supply is a little heavy. In the first two months of the second half that’s October and November, you have a net supply of around Rs 1 trillion.

Definitely the supply is little daunting, but going ahead once the RBI starts the OMO, possibly the demand supply dynamics will be a lot more in favor of demand beyond November. In that point of time, the bond yields can start moving pretty much.

Q: This 7.75 percent target that you have for end of December this year do you think that can happen even without an explicit repo rate cut by the RBI between now and then?

A: There might not be an explicit repo rate cut, but there can be quite a sizeable amount of OMO. It will be very close to a definite repo rate cut expectation because repo rate cut expectation by the month of January will be very strong by end of December.