See 10-year yields hovering around 8.60-8.90%: HDFC Bank

Bond market continues to remain weak and has seen a seminal fall in the past few days after the RBI shocked the street with a repo rate hike. Ajay Marwaha, head trading treasury at HDFC Bank does not see yields on 10 year bonds spiking further from current levels.

In an interview to CNBC-TV18, he said that the bond market has over discounted every negative and 10-year bonds should trade in the range 8.60-8.90 percent going ahead. He further added that auction devolvement seen on Monday was worse than expected. The bond auction for a notified amount of Rs 15,000 crore was devolved partially on primary dealers to the tune of Rs 4,030 crore, which indicates RBI's discomfort with higher yields in the long end. Meanwhile, he feels that the battered Indian rupee could do far better than what it is doing now. He sees some more downside left in the rupee.  Below is the edited transcript of Marwaha's interview with CNBC-TV18 Q: How bad does it get if an open market operation (OMO) is not announced with Friday’s auction do we touch 9 percent or even earlier? A: It could easily touch 9 percent. The key however is the fact that where can you go from here. The market has kind of over discounted every single negative. The repo rate has taken the market by quite a shock. I don’t think people expected this. More importantly, I don’t think people expected the trajectory that potentially repo could now move towards 7.75 percent. If the forward looking curve doesn’t price 7.75 percent, 10-year bond should trade closer to 8.50-8.60 percent rather than 8.80-9 percent, which is where it is now. Q: But immediately there seems to be a buyer’s strike, isn’t it? We got one auction devolved, even the previous two-three auctions one got cancelled, one devolved, one OMO came and rescued it. What about now? Does it go to 9.47 and then Reserve Bank of India (RBI) wakes up and does an OMO, how will the events pan out you think? A: My own sense is that there is some massive amount of negativity is already factored into bond yields at this point at 8.85 percent. Yesterday’s auction quite frankly went a little worse than what the market expected particularly, the 10-year bond. I think 7.16 percent should have performed slightly better is what the market’s anticipation was. So, having said that it will take some time to stabilise, but I do expect it to stabilise because given the current level of rates, given the forward outlook for inflation which is not too bearish right now, don’t expect this to continue to spike. Q: A couple of days rupee has been slightly sticky but by and large there has been a good trajectory, what is the sense that you are getting? A: The rupee could do far better than it is doing. As far as the current account deficit (CAD) is concerned, we are now into some serious correction there and the expectation is that the CAD should pan out better than what even as being extrapolated. So at USD 10-10.5 billion with a positive bias to the CAD, given the fact that flows are now not looking negative, the last three months we have seen significant negative flows, this month we have seen about net flows of about USD 2 billion coming in as of yesterday. Overall, the rupee is doing worse than the numbers show. This is some pent up concern – like import demand, which is normally going to get satisfied only after a correction, which is what we are seeing over the last one week or so. The rupee has some downside left.