Hopeful of a 25bps rate cut by RBI in July: JP Morgan

In an interview with CNBC-TV18, Vikas Gupta of JP Morgan said that the bond yields have found somewhat of a comfort zone due to the open market operations (OMO) from RBI. Therefore, he is hopeful of 10 year yields consolidating at around 8% levels. He believes, the new benchmark is not reflecting 10 year yields accurately.

Looking at the fairly tight liquidity situation, Gupta feels the RBI will prefer OMOs over CRR for infusing liquidity. Although, the RBI has disappointed with an unchanged repo rate, Gupta anticipates a rate cut of at least 25 basis points in the July policy.

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video. 

Q: Do you see the bond yield getting anchored around 8% on the new benchmark bond even going forward?

A: I think we have found a kind of comfort zone on the bond yields, given the fact that we have seen continuous open market operations (OMOs) from RBI. Market has pretty much been able to absorb the supply at the current levels. Though there was a little bit of disappointment after the policy, I think market has got over with it. Going forward, we can see a slow and gradual decline in the yields and we can consolidate in the region around 8%.

Q: The RBI has been much more generous, OMOs post the budget and the announcement of the borrowing programme. How much more would you expect via this OMO route in the next couple of months?

A: Liquidity has been fairly tight and RBI has preferred OMOs over CRR. Market was expecting that RBI would cut CRR in the policy but RBI feels that OMOs seems to be a better route for infusing liquidity. So far, they have done around Rs 60,000-65,000 crore in the first quarter. It is almost like 50% of gross supply which we saw in this quarter.

Going forward also, I think that will be the preferred route for liquidity infusion. And as they have talked about 1% of Net Demand and Time Liabilities (NDTL) as their comfort zone, we are still almost Rs 20,000 crore away from that level. We are going to see expansion in the currency in circulation. We can very well expect that Rs 20,000 plus or whatever we will see in terms of expansion in currency will be matched by OMO backed by RBI.

Q: Some people have pointed out that because this is a new benchmark, it is not adequately representing what exactly is the sentiment in money market and the fact that it is at 8% is not the right way to read the sentiment in the bond market, would you agree with that?

A: I think to some extent it is true because so far we have seen only one auction of Rs 7000 crore in this particular bond. Once we see another couple of auctions and the outstanding stock goes to something around Rs 20,000 crore, probably we will see fair level on this particular bond.

If one were to look at today's market, I would say the fair value of this bond should be around 8.15% or 8.20% given the fact that old bonds are trading around 8.30-8.35% levels. But it is a normal phenomenon and we have seen it in the past as well that this can persist for 2-3 weeks till the time outstanding stock rises in the market.

Q: OMOs aside, is the market also getting hopeful that while the RBI may have disappointed or surprised by not moving either on repo or CRR in June, come July maybe it will and that is something which the bond market might have started pricing in as well?

A: I think that is definitely on the horizon. Over next 30-45 days there are three critical things which the market should be mindful of. First, how the government fares on the fiscal front and do they take any active steps to consolidate the fiscal position.

Secondly, how they move on the fuel pricing front because that has a twin impact. It impacts the fiscal as well as inflation. Thirdly, how does the monsoon pan out? It is going to have a significant impact on food inflation. If these three factors don't disappoint us, I think it will be fair to expect at least 25 basis points in the July policy.