Don't buy bonds now, wait for catalyst: Nomura

The wholesale price inflation accelerated to 5.79 percent in July from 4.86 percent in June giving no respite to policymakers battling a weak rupee and slowing growth. The slowdown in economy has led to increase in 10-year yields causing worry among market experts.

Vivek Rajpal, Nomura India recommends that one should not buy bonds at the current levels of 8.55 percent and instead wait for a catalyst.
In an interview to CNBC-TV18 he says unless there is downside in the foreign exchange (Fx) market volatility meaningful reversal in rates is not possible. Below is the verbatim transcript of Vivek Rajpal's interview on CNBC-TV18 Q: It was an unexpected 5.79 percent coming in on wholesale price inflation. What happens to bonds now, I saw 8.52-8.55 percent? Will we get use to these yields rising even more?
A: Ironically we have moved away from the growth inflation dynamics recently and the bond yields are now responding to the Fx market. Definitely the higher inflation trajectory doesn’t bode well for the bonds but one needs to see how much of this is because of the INR depreciation. So INR depreciation in itself is leading to the rise in inflation trajectory. Overall, currently rates market is absolutely hostage to the Fx volatility and Fx market and irrespective of whether inflation falls or rises, unless we see a downside in Fx volatility the meaningful reversal in rates is not much possible. Q: At 8.55 percent will people buy bonds?
A: One should not fear too much about the levels but look for a catalyst to buy the bonds because it can be much higher than this. One should wait for a catalyst rather than looking at the levels to buy. Q: On the 10-year bonds, we moved very quickly from levels of 8.2-8.3 percent now above 8.5 percent. What is it pricing in currently when it stands at 8.55 percent?
A: The levels are so high due to change in operative rate. Operative rates first went from 7.25 percent to somewhere around 8.29 percent after first round of liquidity tightening measures.
After second round of measures market thought 9.5-10 percent and now it is increasing and its clear that 10.25 percent is here to stay. So market is just reflecting to those changes and the macro situation is not improving. Unless we get the visibility for reversal of these measures, it is difficult to believe that we will see a meaningful reversal. However once that visibility starts coming back, we will see the reversal.