Even as economists debate whether the Reserve Bank of India should or will cut interest rates at its bi-monthly monetary policy review today, the central bank is reaching the end of its rate cut cycle, according to one expert.In an interview with CNBC-TV18, Vivek Rajpal of Nomura India, said that it was "well accepted now" that we are towards the end of easing cycle, adding that the impact of even a rate cut would be low. "Bond yields will rally only by 5-10 basis points (bps) if RBI cuts rate by 25 basis points. We expect the 10-year bond yield is unlikely to go to the level of 6.35."
Below is the verbatim transcript of Vivek Rajpal's interview to Latha Venkatesh, Sonia Shenoy & Anuj Singhal on CNBC-TV18.
Latha: If there is a cut, what will the bond markets do and if there isn't one how will it behave?
A: If we get rate cut probably bond yields will rally only 5-10 bps. I struggle to believe that even with a rate cut, 10-year bond will go much lower, 6.35 kind of level. The point is that it is well accepted now that we are towards the end of easing cycle and towards the end of easing cycle the impact of rate cut on the longer end of the curve is quite low. We expect 25 bps rate cut - that said I do not expect a meaningful rally in the longer end of the curve, so we will not be able to go much below 6.35 zones.
Sonia: What about the tone of the Reserve Bank of India (RBI) Governor. The house is divided on that but what would you be expecting, any hawkish commentary?
A: I do not think it is easy for a central bank governor to get hawkish at this point of time. The only thing is even after a rate cut, we expect that the next rate cut will be tied to 4 percent inflation target for FY18 and that will be the only thing and that said I do not think it is very easy for a central bank governor to communicate that there will be no more rate cuts and there is no need to be hawkish at this point of time.
Latha: Any specific statement that you will be watching out for, if the tone was exactly as it was in the December 21 minutes that we got. How would the market react, anything specific that you want to alert us to that we should watch out for?
A: One thing is clear that they have been mentioning upside risk to inflation for FY17 end 5 percent. I think that will go away -- that was a surprise to the market last time and we have to see how much they tie their future decisions to the FY18 end inflation target on the local front - that one.The second thing that I am keenly watching is how their real rate framework will evolve - that may not come very explicitly in the Monetary Policy Committee (MPC) statement but in the post policy conference call - that is something very important to understand because when they mentioned last time that real rate may have come down, it was really a post Brexit vote and pre US election kind of an environment.I personally believe that after US elections, the need to keep real rates high and the focus on macro stability for all the emerging markets including India has increased, which effectively means that the case for end of easing cycle is even more strong along with the fact that the financial conditions in India are quite easy because of the quantity of money and at this point of time when liquidity in the banking system is ample, there is not much need in terms of focusing too much on the price of money. So those are the two things. How do they focus on liquidity, how much they focus on macro stability - are few things to watch out for.
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