Bond mkt to be stresed despite RBI assurance: Kotak Mah

Mohan Shenoi, president-group treasury and global markets at Kotak Mahindra Bank expects the bond market to be stressed despite RBI’s assurances on Wednesday that it will take action to ensure liquidity in the system. The market is still concerned about the lack of fiscal consolidation, though the statement has at least eased frayed nerves, he told CNBC-TV18. He expects 10-year yields to be in 8.5-9 percent range.

He also expects the long-term interest rates to rise based on its decision to hike repo rates and cut marginal standing facility (MSF) rates. Market is speculating a repo rate hike to 8 percent, Shenoi says.

Also read: RBI may tighten more in October policy meet

Below is the edited transcript of his interview to CNBC-TV18.

Q: Is a five basis points (bps) cooling all that you can expect? Will the yields move only when they see the money and open market operations (OMO)?

A: Open market operations can help to some extent, but we should see the underlying reason why the bond market is as bearish. By increasing the repo rate by 25 bps during the review last week, there is a signal from Reserve Bank of India (RBI) that the long-term interest rates will go up.

Two months ago, the policy objective was to increase short-term rates and keep the long-term rates stable at lower levels. Now the signal given by increasing 25 bps and reducing the marginal standing facility (MSF) rate by 75 bps is that the short-term rates needs to be brought down while the long-term rates need to harden.

Bond markets have been struggling to come to terms with this U-turn in policy within a span of just two months. So, this communication from RBI was needed. RBI has tried to cool the frayed nerves in the bond market by informing the market that if required the RBI will be ready to do OMO.

Having said that, the bond market is still concerned about the fiscal side as the expected increase in diesel prices have not happened. As long as there is no fiscal consolidation signals to the market, bond market will continue to show signs of stress.

Q: What are the yields likely to be ranging at from now till end of December?

A: It all depends on which way the further reviews of monetary policy from RBI. There are already speculations in the market that the repo rate cut go up to 8 percent or 8.5 percent. These kinds of things will keep the yields on the higher side. It will be in a broad range of 8.5 to 9.