Nomura India expects new RBI governor to be dovish

Monetary policy easing will depend on a couple of global and domestic factors, according to Vivek Rajpal of Nomura India. He said expectations of monetary policy easing have risen due to Brexit and to an extent better liquidity in the system have helped consolidation in bond yields.Rajpal said there has been some consolidation in bond yields. Bond yields have risen 15-17 basis points (bps) since the Brexit and the uptick should be limited to another 5-7 bps for another two months, he said.He expects the new RBI Governor to be dovish as opposed to outgoing RBI chief Raghuram Rajan who has been hawkish on monetary easing.He added the inflation data at 5.7 percent has been in line with market expectations.Echoing Rajpal's views, BSE and NSE member, Dipan Mehta said the CPI data released on Tuesday is unlinkely to have an impact on the market.Mehta said that the market is focusing on good monsoon and the companies and sectors which benefit from it. Once the Monsoon Session begins, the focus will shift to GST Bill, he said.Below is the verbatim transcript of Vivek Rajpal and Dipan Mehta's interview to Ekta Batra on CNBC-TV18.Q: Well the yields actually had a rally because of all the news going around with regards to the RBI governor and who it could be next. Your sense in terms of where they are headed now, we are down around 17 basis points from the Brexit levels?Rajpal: Since, Brexit clearly a monetary easing expectations have risen which has led to move down in yield. I think other thing which has definitely helped market is better liquidity in the banking system. If you really see liquidity in surplus mode and that is also putting downward pressure on the yields. Having said that after such a big move, I would expect some consolidation around current levels, but as far as the uptick in yields is concerned that should be quite limited. I would assume that after as you said 17 basis point of rally, probably, uptick should be limited like to 5-7 basis point, so we should now sustain on a lower side of the range for over next month or two months or so.Q: Do you think that this CPI data which has come out today at 5.77 percent, would that impact the yields at all or they will look past it and look at who the probable governor is and what’s happening in global yields?Rajpal: As far as inflation is not too far from what the market was expecting and at 5.77 percent it is actually closer to the market expectation. I believe it in itself is not big mover. I think the real trade as far as bond yield is concerned is really a real yield trade. We have seen disinflation trade already playing out in the bond yields. Now the next trade is really the real yield compression trade and I expect the difference between for example bond yields versus inflation to compress. This will occur on account of two reasons, one because of the liquidity surplus there should be a compression between the nominal yield and the inflation and then there should be a monetary easing expectation, which should also compress the real yield.Q: In your sense out of these 15-17 basis softening that we have seen from Brexit levels. What would you attribute most of it to, what’s happening in terms of the expectation that central banks will ease because of the possible repercussion of Brexit that would take place or is it more likely about who the RBI governor would be and whoever the RBI governor would be, would most likely have a more easing bias as compare to Dr Rajan.Rajpal: Right, I think it is a mix of both. Clearly, if there are worries on the global front that increases the chances of monetary easing. Having said that the new governor and the expectation that the new governor will be dovish is one of the major factors that is playing into the market. As I said there is a third factor as well which is the better liquidity in the banking system. So broadly it is a mix of things, but the recent rally can easily be attributed to the fact that the market is expecting the new governor to be dovish versus Dr Rajan who was rather on the hawkish side earlier.Q: How do you think the markets are going to read this (IIP) macro data? Do you think they are just going to possibly ignore it and the market has much more on its mind?Mehta: Generally, the number is in line, it should not have much of an effect on the market. Right now I think we are seeing lot of focus on the monsoon and companies and sectors which benefit from monsoon and overall uptick in the economy, I think to an extent the interest rate expectation of further decrease in interest rate cut is not so much in the minds of the traders. Maybe a 0.25 percent cut sooner or later over the next few months or so may have already been priced in. However the big theme that we are all playing at this point of time is the monsoon theme and once the Lok Sabha and Rajya Sabha start then it will be the GST and the focus will be there.I see stability grow in global markets, that is also something which is favouring our markets. So, CPI inflation and all these price dated data points have been relegated to an extent to the background.