Despite the Reserve Bank of India's surprise open market operation (OMO) action, the bond yields are still trading close to 8.6%. PN Vijay expects bond yields to be around 8.5% for the next three-four months.
Portfolio Manager, PN Vijay expects the much-talked about petrol price hike to be announced within the next one week. Given the high inflationary scenario, Vijay is sure if diesel and LPG prices will also be raised.
Despite the Reserve Bank of India's surprise open market operation (OMO) action, the bond yields are still trading close to 8.6%. He expects bond yields to be around 8.5% for the next three-four months.
"Overtime the bond markets may not touch 9% probably they may touch 9%, but the liquidity in the banking system itself has to improve and that will take a bit longer, he added.
Below is the edited transcript of the interview. Also watch the accompanying video.
Q: What are you hearing on the oil price hike, everyday we are hearing fairly dire cries from the oil marketing companies but everyday passes and we don’t get that petrol price hike. What is the grapevine telling you?
A: Petrol price hike will happen over the weekend; normally this comes on Friday evening for pumps to adjust their prices. I think that’s a fairly non-controversial. I don’t know if the government will bite the bullet on diesel and LPG given relatively high inflation scenario, so my sense is that petrol hike will happen within next one week.
Q: The big stars yesterday were the entire power pack. What did you make of the news flow around them and does it look like this is a good space to start buying afresh?
A: The news flow is very significant and I am not surprise that PFC and REC just shot up. The electricity boards in the States have been ailing, even word ‘ailing’ is understatement, they are in the ICU. The state government is very popular, there is not even a single coalition government in any of the States in India except Maharashtra. So, the State warlords are able to get anything done unlike Dr. Manmohan Singh able to get nothing done.
Jayalalitha could and did increased tariffs by 37%. This is a couple of days after Andhra did a huge hike, UP is going to be doing it in the next few days. This means that in the first instance, the lenders will get their money back and will stop having to provide for these loans. Eventually, the electricity boards will start placing bigger orders on the T&D space and little bit in the generation space.
So, all this is adding up to a huge positive and the trend will continue I am sure in the next few days. Added to this the government probably using such a heavy roller as presidential directive to ask Coal India into allocating 80% to power plants shows the determination of the government at least to get this sector going. This augurs well in the near term for the power financiers and in the slightly longer term for the T&D equipment suppliers and the BHEL of the world.
Q: What signals are you picking up from the bond market because their yields have been stubbornly high despite the surprising OMO from the RBI yields are still very close to 8.6%? How do you see those dynamics moving till the 17th of April?
A: It’s going to be very tight because the macro situation is extremely difficult for India and it’s almost a vicious circle. The rupee is weak given the current account deficit, so the RBI has to keep selling dollars to keep the dollar somewhat under check. RBI does that they buy rupee from the banks, they don’t give the dollar free, so that brings a sucking pressure.
The government’s announcement of 63% of the borrowings, which themselves quite large of the fiscal borrowings to take place in the first half that means there is going to be enormous supply coming in. So, the present level liquidity is being addressed by the 125 bps CRR cut and OMOs which RBI is doing, but that as best risky operation.
Overtime the bond markets may not touch 9% probably they may touch 9%, but the liquidity in the banking system itself has to improve and that will take a bit longer, so around 8.5%, which is very high by global standards is something that we have to live with at least for the next three-four months.
Q: BHEL reports its provisional numbers today, are you expecting to see anything different from the guidance they have set out because the mood has been quite circumspect on that stock?
A: It’s possible that BHEL being a public sector enterprise and Navratna has asked to do it within the first few days, but these are numbers very unreliable. They will be very tepid because the order inflow has been very tepid and they have not got their 19% import duty, which they were hoping to get. It is all going to be quite tough for BHEL and I will not be surprised if we get some very tepid numbers.
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