Oct 04, 2016 03:24 PM IST | Source: CNBC-TV18

RBI Policy: No cut could result in bond yields rising to 6.80%: I-Sec PD

A Prasanna, Chief Economist, I-Sec PD is of the view that the statements coming out of the Monetary Policy Committee (MPC) today would be dovish even if RBI does not cut rates today.

A Prasanna, Chief Economist, I-Sec PD is of the view that the statements coming out of the Monetary Policy Committee (MPC) today would be dovish even if RBI does not cut rates today. The house per se does not expect RBI to cut interest rate today.

According to him the committee is unlikely to deviate too much from the previous format but would keenly watch for the commentary in terms of guidance and whether it retains the ‘accommodative’ word and their guideline on liquidity.

If RBI does not cut today and maintain a dovish stance, then market will be disappointed resulting in 10-year bond-yields rising marginally to 6.80 percent. However, he does not expect too much downside for bonds because globally there is a bond bubble.

He would also look for growth outlook from the MPC commentary, says Prasanna.

Below is the verbatim transcript of A Prasanna's interview to Latha Venkatesh, & Anuj Singhal on CNBC-TV18.

Anuj: What do you think the bond market has already factored in and going forward what is the likely trajectory in case we have 25 bps rate cut?

A: Bond market has already factored in 25 bps cut sometime between this policy and the next policy and definitely the expectation is of dovish guidance even if Reserve Bank of India (RBI) doesn't cut in this policy.

Our expectation is they will not cut in this policy and cut in December but suppose if they do cut in this policy, market will still kind of press ahead with expectation of one more cut sometime later in this calendar year or next year. Of course we are not sure that cut, more than 25 bps cut, will be in the offing but given the kind of inflation profile we are seeing; I think market will continue to expect more accommodation from RBI.

Latha: What all will you watch out for from the policy?

A: This is a new experience for us because its Monetary Policy Committee (MPC), we do now know whether the statement will change. Of course our base case is the statement will not change too much in terms of format from the previous statement given that the MPC hasn't had much time to come to grips with the macro parameters but of course we will be watching out, the rate decision is given and then there is a guidance whether RBI retains a word 'accommodative' in the statement and of course liquidity; what we think now will happen is MPC will perhaps give a broad guideline to RBI in terms of saying that we are going towards neutral stance on system liquidity and leave it to RBI to choose the instrument to implement that but it will be very important that they say something about liquidity in the policy statement.

Latha: What is your trajectory of bond yields? First, a near term question, if the cut doesn't come but the dovish stance is maintained as you expect, where does the 10-year go from 6.76 that it is now holding and by December 31 or March 31, where do you see bond yields?

A: In the near term if a cut doesn't come, there will be some disappointment because market is positioned for a cut. So yields could back a fight to 7 bps from here, so perhaps you could be ending the day around 6.80 on the new 10-year.

However, by December we do not see too much of downside in yields from here. Personally my view is that globally we are in a bond bubble and some of it is reflected in India also, so in that sense it is difficult to forecast, the bubble can continue for quite some time but my sense is that at some point the bubble is going to pop and we will see the effect in India also. So from 6.75 from here on, personally I do not have too much of a view on yields going down.

Latha: Not even by March 31?

A: No. I think by March 31, I am more confident in predicting that the global bubble pops. So we will see the effect in India also.

Anuj: Does the bubble get bigger in case there is 50 bps rate cut today?

A: If there is a 50 bps rate cut then bond yields will rally significantly then perhaps 10-year will go towards 6.60 and 6.50 will be insight but it is highly unlikely, in fact I would put a probability at very low. MPC meeting for the first time and still there are some inflation risk there and in the next year in the form of goods and services tax (GST), pay commission implementation, cutting by 50 bps will be too big a step.

Latha: Anything you expect on growth that he will say which the market will take notice or will that be ignored?

A: I think whatever their assessment of growth, which has been there in the last few policies, will continue. However, maybe one thing RBI should point out is nominal growth is improving, so one of the problems is because of the way we measure growth - that message has been kind of lost since the real growth does\\'t change much, its largely in the seven handle, it doesn't look like much has changed but if you look at nominal growth, it has been improving. So we think underlying -- there is a sense that growth is picking up. Of course it will be interesting to see if RBI does flag it off.

Latha: If the Governor were to say something about real rates which Rajan had said, 150 bps or positive real return. How will you interpret it? If he evades that question, how will you interpret it?

A: The base case is that they will continue with the formulation which Dr. Rajan had put forward that he will try and guide keeping in mind real rates of 150-200 bps. If they evade the question or they dilute it then it clearly means that RBI is going back, which definitely then opens up space for more rate cuts. So, in that sense that will be an important question which hopefully they will answer today.

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