SENSEX NIFTY
Jul 22, 2013, 04.57 PM IST | Source: CNBC-TV18

Yields may drop 15 bps further on no RBI action: Nomura

RBI cancelling T-Bills auction and taking much lesser amount in OMO auction has helped in keeping yields down, which is currently a little less than 8%. If there are no measures coming from the central bank until policy, then yields may drift further down, says Neeraj Gambhir, Managing Director & Co-Head, Fixed Income India, Nomura India.

Bond yields are currently trading a little below 8 percent and if the Reserve Bank of India (RBI) does not take any further action between now and policy (July 30), then yields are likely to drop by another 10-15 basis points, cautions Neeraj Gambhir, Managing Director & Co-Head, Fixed Income India, Nomura India.

Last week the central bank cancelled auction of Treasury Bills and sold Rs 25 billion, which was hardly one fifth of the amount it hoped to raise, in a sign of further confusion over debt valuations in the aftermath of moves to curb rupee's volatility.

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In an interview on CNBC-TV18, Gambhir added that RBI has strongly defended the rupee at 60 per USD earlier by physical intervention and it does not want the rupee to breach 60 per USD.

"But the entire move in rupee was not just India’s current account deficit (CAD) and India’s macro fundamentals, it was also about what dollar has done globally and how the dollar exchange rate has been against the emerging market currencies," he explained.

Meanwhile, if overnight rates in the short-term money market continue to remain at elevated level then outflows will get stemmed to some extent, he added.

Below is the verbatim transcript of Neeraj Gambhir's interview on CNBC-TV18

Q: The yield has cooled down a little bit to sub 8 percent over the last couple of days. Do you see it sticking there after the outcome of the auction?

A: Yes, certainly Reserve Bank of India (RBI) has tried to nuance their measures in a way that they should not have a bigger impact on the yields and that is why they have canceled the auctions in the Treasury Bills (T-Bills) and they have also taken much lesser amount in the open market operations (OMO) auction. So certainly both of these things have helped them, even in this auction they really did not go all the way up in terms of setting the entire set of bonds, some bit of that was devolved to PDs.

Again that was done probably in a bid to cap the rise in the yields. So all of these things have helped and we are currently just a little less than 8 percent and from here onwards the markets will basically look forward to what RBI has to say more or do more and depending upon that take a cue. If we do not see any measures coming in from here until the policy then the yields could drift down a little bit lower, may be 10-15 bps. But really between now and policy the key question is what is the next step from RBI.

Q: What is the calendar looking like for the next couple of weeks, the auction calendar, is that going to create extended nervousness in the bond market?

A: Surprise definitely there because the government needs to borrow and the demand is going to be particularly weak depending upon what RBI measures come into play. So clearly the supply side will weigh on the market.

Q: What is the currency looking like now because it seems over the last couple of days the RBI is putting some fairly solid kind of intent behind its interventions both with policy and directly? Do you think 60 per dollar will hold for the moment?

A: 60 should given the way RBI has very strongly defended 60 earlier by physical intervention, now by these set of measures. I think the whole intent seems to be to make sure that rupee does not breach 60 meaningfully and we continue to trade somewhat better than that. However at the end of the day this entire move in rupee was not just India’s current account deficit (CAD) and India’s macro fundamentals, it was also about what dollar has done globally and how the dollar exchange rate has been against the emerging market currencies.

So we have to also look at some of those factors to see where rupee goes from here. Also the fact that what is the strength of the next round of measures if there is any from RBI. Bear in mind that currently whatever measures that they have taken, we haven't yet seen the overnight rates go up to 10 quarter. The overnight rates actually have been pretty soft in that sense. So the question is will RBI follow it up with another set of moves, another set of measures and what those measures will be like, could also decide the direction of the rupee in the next few weeks.

Q: What do you hear anecdotally about flows out of the bond market? Has this backstop on the rupee stemmed the outflows or does that continue at a slower pace?

A: I think the outflows have slowed down quite a lot, we also have another auction for Foreign Institutional Investors (FIIs) today. So we will see what kind of response that auction generates. In the past FIIs have actually bid for the auctions but they have not really converted into physical purchases in the market so again we will have to see whether that gets converted given the way the yields are at this point in time. I do feel that if the overnight rates in the short-term money market continue to remain at elevated level then the outflows will get stemmed to some extent.

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