RBI unlikely to cut rates before 2016: Nomura

Q: It has been a strong run in terms of the debt inflows that we have seen for our markets. For example, we have done around Rs 1 lakh crore already on year-to-date (YTD) basis and August has been extremely healthy especially last Wednesday, when where there was a strong foreign institutional investor (FII) figure that came in. What are the FIIs talking about when it comes to the Indian debt market?

A: India bonds, India rates are among highest in Asia and with macro fundamentals of the country improving there is an interest in India bonds. What we are seeing is just reinforcing the view that FIIs are taking towards India macro story.

Not only that the macro fundamentals of the country are improving and have improved a lot. Secondly, as far as monetary cycle is concerned, we are at the cusp. So, most of the people, most of the market participants also expect some kind of monetary easing down the line though it may still be too early to have the visibility. However, there is a gradual disinflation in place in the country and the next step is monetary easing rather than monetary tightening and all that is boarding well for India rates.

Q: Tomorrow Dr. Rajan will complete one year tenure, going forward what would be the key expectations in second year and when is the earliest that you think he would be in a position to cut rates?

A: Our house view is that we will see rate cut only in 2016. However, as far as the longer end bonds are concerned, what matters is a combination of inflation trajectory, a combination of easing expectations, supply demand.

Even if we have a monetary easing only in 2016 there is substantial possibility of a rally from the current valuations heading into 2015 and then in 2015 itself. So, market always leads the cycle rather than wait for the actual easing to get delivered and that is something that we will see into next year.

Q: Give us a little bit of a near-term perspective for the bond markets. What is the range you expect up till the next RBI policy?

A: In the near-term, I think markets are rangebound. Around 8.45-8.65 percent kind of a range is there in 10-year bond. The reason is that markets were actually expecting some kind of an easing to get delivered soon at least after the June policy meeting.

RBI earlier was very hawkish and then it turned dovish in June meeting and then last meeting it turned neutral and market sentiment is relatively jittery in the near-term. So, in the near-term we would expect 8.45-8.65 percent kind of a range but ultimately, as we go ahead and gradual disinflation takes place, we would expect 8.45 to get breached rather than 8.65 percent.