Visible RBI rate cut can see yields fall: Nomura India

Bond markets are reacting differently after the RBI said yesterday it will purchase sovereign notes at an OMO auction this week to help the government sell a record amount of debt.

While bonds gained due to the optimism surrounding a fall in crude prices and a global risk-off, a little bit of positivity is being taken away by the rupee being under continuous pressure.
Nitin Jain, managing director and company-head, fixed income of Nomura India says the market will not be in a position to have a clear view at this point of time as the trajectory of the yields is uncertain. Below is an edited transcript of his interview on CNBC-TV18. Watch the accompanying video for more. Q: Do you see further gains on the 10-year? Can the yields go all the way to 8.4% or are all the current positives priced in, in this sub-8.5% level?
A: I am afraid that trajectory is slightly uncertain. There is nothing to deny that the yields cannot fall to 8.4% or they may go back up to 8.5%. At the end of it these are very small ranges that we are talking about. The backdrop is of course a decline in crude prices and global risk-off. But a little bit of positivity is being taken away by the rupee being under continuous pressure.
The recent rally of 20-25 basis points is essentially being cartelised by RBI open market operations (OMO). But a forward looking view is not very clear and I do not think market will be in a position to have a clear view at this point of time. Q: Yesterday there was an ugly inflation number and a range of economists were only negating any possibility for the RBI to cut rates. In that context, this gain in bond prices and fall in bond yields is a little contradicting, isn’t it?
A: Yes, that can be seen as a reaction to this OMO announcement. There was always a possibility that the RBI does not do a follow-up OMO, which they did so that can be seen in that context. At the end of it what it is telling us that things are confusing for the bond traders at this point of time. Visibility, though the rate cut cycle is more or less certain as in - it will be a cut, visibility around the action at what point of time I think is very difficult to predict.
Everybody is awaiting the government’s action on the oil prices front and now there is a little bit of concern around the monsoon forecast. We have seen for the last two years the RBI saying that even food can lead to generalised inflationary expectations. So we have to be careful around the impact of monsoon. We also have a situation where the core inflation came quite benign yesterday at 4.74% compared to the expectation in excess of 5%. So there are a lot of contradictory push and pulls at this point of time.