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Jun 19, 2012, 12.28 PM IST
After the RBI's stunner to leave interest rates unchanged yesterday, Neeraj Gambhir, managing director and co-head, fixed income India, Nomura India finds it difficult now to narrow down when the central bank may possibly cut rates ahead.
The RBI left its policy repo rate at 8% and the cash reserve ratio at 4.75% putting the onus back on the government to revive the flagging economy. Bonds, stocks and the rupee fell after the RBI’s tough policy stance.
The RBI addressed the liquidity shortages with a willingness to undertake further open market operations (OMO) after undergoing four such actions since the start of May. Gambhir says that bond yields are likely to fluctuate based on the timing and quantum of the OMOs.
With lack of policy guidance from the central bank, Gambhir says the potential for yields to harden from here is high. He, however, sees bond yields ranging between 8.25-8.50%.
Below is an edited transcript of his interview. Watch the accompanying video for more.
Q: Where do you see the yield moving from this base of 8.12-8.13% after what you heard yesterday?
A: The forward guidance on the policy is not very clear. By linking the policy rate actions to inflation, which we know is going to be sticky at least in the medium-term, it is becoming very difficult to predict if and when the rate cuts will materialise. The market had priced in quite a lot of the talk around the repo rate cut and the CRR cut and what not. Some of that has to give away.
So there could be a potential for the yields to harden from here onwards. The 8.12% level that you see on the 10-year benchmark is probably a little bit misleading because that is a very new security that has been issued and has its own quirkiness. The central tendency of the rates could be towards 8.5% level and that could imply some correction on the new benchmark as well as the fresh supply aspects of it.
The market today is a little bit supported because the belief is that after not doing a repo rate cut or a CRR cut, the RBI should at least support the liquidity and hence there are chances of further OMOs happening along with auctions and if those don’t materialise then the yields could correct pretty significantly but even otherwise I believe that the supply is going to be fairly significant and the market would probably not have a clear direction as to when and under what conditions the rate cuts could materialise. So that is something which is going to drive the market.
Q: On the liquidity situation do you think there is enough in terms of upping the export credit finance levels because the opinion seems to be that that is the smoother way of doing it than moving on CRRs or moving on more OMOs?
A: The export refinance is definitely a different kind of liquidity injection window and to my mind slightly better than the repo because it is unsecured credit given by the RBI. So it helps banks expand their balance sheet for a particular segment. Therefore, it is definitely a much better window. I do believe that a CRR cut is far more beneficial than the export refinance because not only does it impact liquidity, it also impacts the pricing of the bank credit because CRR is unremunerated in the Indian context so basically banks don’t earn any interest on the CRR balances that they keep with the RBI.
If there is a CRR reduction, it helps significantly in monetary policy transmission. Export refinance comes at the same cost as repo. So it is the same price money, it is more of it but it doesn’t do too much to the transmission. From a monetary policy transmission standpoint there is a substantial difference between the export refinance and CRR. There would be liquidity available which was always the case in the reverse repo as well but I don’t think the price of that liquidity comes off, which is what is required for the bank lending rates to come down.
Q: Because of this lack of policy guidance and a sense of confusion almost as you have indicated, how wide do you think the range for the benchmark will be? Are we looking at a volatile bond market situation in the next six months or a tight kind of move?
A: The dynamics around the bond yields are going to be OMOs by RBI to buy the bonds, the timing and the quantum of it as well as directionality of government’s policy actions as well. So those are the deciding factors. I do feel that inflation is going to be little bit sticky in the medium-term and do not see it coming down very substantially. Any positive bias from that aspect looks somewhat difficult at least in the next few months timeframe.
I do feel that bond yields are going to be tightly ranged. I think about 8.25%-8.5% is the range that I have currently in mind but any substantial downtick would require very clear policy guidance by the RBI or a very clear sort of policy action by the government. An uptick would depend upon whether OMOs materialise in the size and quantum that is required for the market to feel supported.
Q: As we speak, the rupee has moved past 56 again and it is the first step was taken after the Fitch warning yesterday. Anything new in what Fitch said and do you continue to see the rupee under pressure?
A: I think what Fitch said was basically a reiteration of what is already out there in the public domain. I don’t think there is anything substantial. The S&P outlook was anyways negative. So I think Fitch with the revised outlook is inline with what the S&P had said earlier. It is consistent in that sense but it sort of brings forth and I think both the things happening on the same day, lack of policy action by the RBI which could have been growth supportive and the Fitch reminded the market about the fiscal situation - both things put together is something which has impacted the rupee.
In the current environment where there is pretty little to look at from the domestic front, I think for the rupee at least, it is the global factors which could play a dominant role. If we see a situation wherein the European crisis worsens, it could impact the rupee quite negatively. As we have seen in the past that rupee could be an outlier currency in terms of how the performance is.
In the near-term, it is very hard to give any technical levels where it could pause and halt. We could potentially see a take out of the previous high and then the rupee could pause around that level and then look for further direction.
Tags: Reserve Bank of India, Neeraj Gambhir, Nomura India, repo rate, cash reserve ratio, open market operations, bond yields, Fitch
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