See 10-yr yield near 7.55% on pre-policy rate cut: BofA

The January Consumer Price Inflation (CPI) inflation, As per the new series, rose to 5.11 percent from 4.28 percent in December which by all measure is in the comfort zone of the Reserve Bank of India. With lower oil prices, normal monsoons and a reformist government at the Centre, hopes of another round of rate cut has started building up once again.In an interview to CNBC-TV18, Jayesh Mehta, Managing Director & Country Treasurer at Bank of America says he expects three more rate cuts from the RBI going into new fiscal and sees March inflation at 5.5 percent. Mehta talks about rising rate cut expectations in the bond market after the January data. The yield on 10-year paper is likely to be in 7.55-7.7 percent range and can go down to 7.45-7.55 percent range if the RBI slashes rates pre-policy.

Below is the transcript of Jayesh Mehta's interview with Ekta Batra & Reema Tendulkar on CNBC-TV18. Ekta: What is the bond market expecting from the Reserve Bank of India (RBI) now post the consumer price index (CPI) data last evening? A: I think as your channel said yesterday, everybody who are conservative have increased their rate cuts, somebody who is expecting one rate cut is now talking about two, somebody who was expecting two is now talking about three, we were at three more and we continue being at three more, which is for the financial year. Of course, if the real economy something starts happening up, I will not be surprised if it is another four-five more before September 2016. However, of course that is a little bit longer-term view. Immediately whether people like it or not but this is the number, which is going to come going forward and this number is now the reality and that is expecting your March inflation, which was earlier the range was 5.70 to 6 percent is now 5.5 percent is what people are expecting. That is there -- or even be surprised if there is a cut before the policy. If there is a cut at the policy and nothing before that then it would be a deeper cut maybe 50 bps but if it is in between, it would be just token 25 bps. That is what we feel at this juncture.

Reema: Clearly the street is expecting another 50-75 bps of rate cut from the RBI. With the bond yield at 7.7 percent, is it priced in and where do you see the yields moving in the next three months and six months? A: Three months definitely -- people are going to be whether it is immediately after the Budget or at the policy -- that one month period is quite a waiting period. Assuming if this comes in the policy, we might see 10-year at around 7.55 to 7.70 percent, which is what the current range is. But if we see a cut earlier than that then the range would change to 7.45 to 7.55 percent and as we will go to the next year, of course there will be supply also there every week. So that would keep a little bit yields on the higher side but still it will be in the range of basically whatever the policy rate plus 5-10 bps is what is going to be the range for the next six months. Ekta: Two part question -- one, do you think that maybe there could be a school of thought that the RBI would like to look at the trajectory of the new CPI and hence may be we could see a delayed cut from the RBI though there could be cuts but more in the second half of the fiscal and secondly, your expectation from the borrowing target from the Budget? A: Budget borrowing will stick to the fiscal deficit. Now of course you have the gap even because the GDP is reforecasted. That is exactly the point, if RBI gets some time before cutting rates in April policy and if they see some more action, more than data is the action on the quality of fiscal deficit, the implementation of stalled project and all that, if they see the ground reality, the real economy working, they would go for a deeper cut. And I think that is why just having the January number, maybe it will wait till March 12, see the February numbers, see the trends going forward, that would have been the most ideal thing; but you never know what is going to happen. So this expectation is built up that whether you cut it in April or whether you cut it in anywhere from February 28 to March 15, people are going to be completely in sync with that.