Don't see 10-year bond above 8.25%: S Narayan

In an interview with CNBC-TV18, former finance secy S Narayan spoke about his reading of the RBI credit policy and the road ahead.

Below is an edited transcript of Narayan’s interview on CNBC-TV18. Also watch the attached video. Q: What is your initial take on the RBI credit policy?  
A: The markets had factored in a rate cut or a dovish policy in some shape or form. The fact that we have not got anything, I think the response is clearly being muted by anticipation that we will see OMOs coming through and therefore there will be some amount of demand from the RBI to suck out some of these bonds from the system.
To that extent, capping the yields for the new bond at 8.14% is a reasonable positive in absence of this any rate cut. The second point I would like to make on the refinance. Frankly, it is an encouraging sign -- the increase of 52% of the export refinance. While money is available at that 8% repo rate, what we would like to see is some kind of directed monetary policy, i.e., make sure that money is available at a reasonable cheap rate to the sectors, which deserve it -- whether it is infrastructure investments whether it is exports.
Now the fact remains that the CD rates in the banks remains way above the repo rates (9.60-9.70%) and there is little chance of that coming off now in the absence of any monetary policy impact. However, for specific sectors like exports a part of the money can refinance at low rates and not the marginal rates from banks.
I am hoping that means that you do get eventually credit going to sectors that deserve it, especially infrastructure, investments and exports. Q: What kind of a trajectory do you now see for the 10 year? How do you now look at it six weeks down the line? How do you look at July 31?
A: One thing we have got to keep in mind is that you got a lot of international events happening over the next few weeks. You got the FOMC coming up, you got expectations on variety of central banks acting from BoJ to BOE. You got EU summits coming up and all eyes on Greece event though the news over the weekend was positive. So, a lot of international events are coming up, including ones from China etc.
Otherwise, this pause by itself does not mean much. I think all eyes will shift to the next policy up in July. Clearly, from my perspective, growth is a critical factor right now. A lot of macro economic instability actually starts from the slow growth that we are seeing particularly infrastructure and investments.
If the Reserve Bank continues to be focused on inflation and therefore resist from injecting liquidity in the system in large fashion or cutting rates then the marginal cost of funds for the banks is going to remain extremely high 150 bps high then repo rate etc, that does not auger well for growth on an ongoing basis.
It would mean from perspective of dollar rupee pressure continuing because frankly end of the day India’s story is depended on the growth story.
For bonds, specifically, the fact that we have OMOs available is going to apply a lot of balm. So even if you do have supply coming through because of the fisc, I suspect that new 10-year bond will not go beyond 8.25% because you will have RBI soaking out this extra supply by way of OMOs.