Bond mkt to see less impact; eco pace a huge worry: Nomura

Market experts believe that the gross domestic product (GDP) data of 4.4 percent will not impact the bond markets significantly. Neeraj Gambhir, MD & co-head- Fixed Income India at Nomura India told CNBC-TV18 that bond markets currently are driven by currency’s behaviour, which is unlikely to affect them right now.

He is also wary of the huge rate cuts needed to infuse liquidity and bring the economic momentum back on track. Overall, he sees a doom for the market going forward. Also read: Q1GDP: HDFC Bank's Baruah wary of trade & hotels data Below is the edited transcript of his interview to CNBC-TV18. Q: How will the markets react to this? This is a bad number from private final consumption and capital formation view, numbers are more eerie. Do the bond markets have any space to react positively? Or will rupee rule the roost? A: The fact that we are printing lower than 4.5 percent when market anticipated 4.6 – 4.8 percent shows that the underlying weakness in the economy is far higher than expected. Currently, the bond markets seems to be in the grip of an altogether a different phenomena; currency. To the extent these numbers have a bearing in the currency markets they will have an impact on the bond market too. Under normal circumstances such a low and weak print on the GDP would have meant that the bond yields rally up or go down quite a lot. This will not have as much of an impact compared to rupee’s opening on Monday, or what happens in the US on Friday. Once the dust is settled with the currency, the amount of interest rate cuts that probably the RBI will have to make for a monetary stimulus does seem to be increasing. We are getting into that stage where the economic momentum is losing its momentum sharply. To get it back on to the track will take a huge amount of stimulus as compared to what markets are currently thinking. The impact on the bond market will be driven a lot by currency in the near term, but really is not a good sign at all. Q: Do you expect foreign funds to react very negatively? Is this is largely factored in especially by equity funds? A: If one looks at the overall strategy of Reserve Bank (RBI), for the past few months they have been reducing the rates and acknowledging the fact that growth is important. The fact that we were actually looking at some kind of inflation management strategy before that and now the increase in the interest rates to defend the currency - was an attempt to compress the demand, which is happening currently. The level is a little worse than what the market had thought, but at the end of the day the fact that we had a substantial loss of economic momentum and it is a pretty gloom and doom scenario. I don’t think at the margin it adds substantially to that, but tells you that demand is collapsing fast. As far as the FII flows are concerned, certainly in the fixed income market there are other variables which are at play at this point in time. This could probably determine the directionality of the flows in the near-term. Q: China seems to have hit a bottom. and we are seeing better PMI numbers. Even their bottom is actually at 7.5 percent. Do you think that event of any money been given to emerging market funds it is going to be away from India and in favour of China? A: As far as the equity markets are concerned, it is slightly different over there. As far as the fixed income markets are concerned, I do not think it is the direct comparison between the two economies. It is more to do with what is the relative value between the various economies in terms of the credit rating and the yields being offered etc. So it is relevant, but it is not that much relevant that we will see a substantial withdrawal of the funds from India right now and those being invested in China for example, but I certainly agree with you that this is not a great print and this is going to have some impact on the sentiment as far as the foreign investors are concerned. We need to be watchful of at what point in time the rating agencies start to get worried about the GDP growth. At some point in time the deceleration in the growth will start coming into their calculations and the fact of the matter is that with a fixed fiscal deficit number as the growth goes down your fiscal deficit adjustment does not look too good. So that is the big concern from a fixed income investor standpoint and people will be watching for it.