Jan 25, 2012, 06.19 PM | Source: CNBC-TV18
Dhawal Dalal of DSP Blackrock Mutual Fund says the market is expecting further cash reserve ratio (CRR) cuts in March-April after the 'surprise' 50 bps cut in January by Reserve Bank.
He feels the market is drawing comfort from the RBI move to improve liquidity. The rate cut underscores a policy shift from fighting inflation to reviving growth. "I think the liquidity situation is comfortable until say about February," he adds.
According to Dalal the concerns around further open market operations led to higher yields. "The technical pullback was overdue in the bond markets," he says.
Below is an edited transcript of Dalal's exclusive interview on CNBC-TV18. Also watch the attached videos.
Q: What has led to this comeback from 8.08-8.38%? What would you put it down to?
A: I think there were two parts to the whole movement. Before the run-up to the credit policy, the bond yields dropped very sharply. From the peak of around 8.30-8.35%, it came down in a very sustained manner. So from a technical perspective, there was a pullback which was coming and the RBI governorís hint on OMO provided that trigger. Thatís why the bond yields have pulled back to around 8.38%. We believe that from the technical perspective, it could settle between 8.45-8.55% and that should provide a great opportunity for the investors to consider investing at these levels.
Q: Do you think it is likely that the yield goes back to 8.45-8.50% in the next few days?
A: I think it is just the auction announcements which receive a significant amount of support then you could probably see yields drifting. I donít see any sharp kneejerk reaction for yields because whatever was to happen has already happened. In the near-term, we expect no significant negative news. But the yield could probably trend. But from a technical perspective, the levels between 8.45-8.55% could be great.
Q: What are the chances that we see a drift back though for yields getting all the way back to 8.15% zone or lower than that? What would that be contingent on?
A: I think the Reserve Bank of India has very clearly said that the interest rate easing cycle has begun with a CRR cut. Market participants are expecting more CRR cut either in March credit policy or April and followed by rate cuts. Most of the market participants are penciling between 75-100 basis point cut. We believe that it could be between 50 and 75 bps. So all in all, provided that inflation in the global markets and in India behaves as per the expectations and fiscal deficits remain within control, there could be a sustained decline in interest rates which could take the benchmark 10-year to around 8.25% or lower.
Q: Apart from what happened on rates, a lot of the economists and bankers were quite concerned about the liquidity situation. Has that been adequately addressed with the CRR cut, with the promise of more OMOs?
A: I think the CRR cut has come as a surprise and most of the economists polled by Bloomberg suggested that they were not expecting a CRR cut. So it is a surprise and I think it should address the liquidity concern in a sustained manner. If the liquidity condition continues to remain tight in March on account of advance tax outflow and constraint in the government spending, then there is a possibility that RBI might consider another CRR cut at that point of time to address the liquidity. But by and large, market participants are drawing comfort that the RBI is there to address liquidity concerns.
Q: Is the OMO confusion resolved after the statement from the deputy governor or is there still some uncertainty on the OMO calendar after yesterday?
A: My sense is that the market participants have reacted very seriously. The point remains that the CRR cut amounts to four OMOs if you look at the average of Rs 8,000 crore. So that should be addressing your one month liquidity needs and that should take you to the end of February and by that point of time, if the liquidity situation requires, then there could be another CRR cut later on or it could be combination of OMO between then and middle of March.