In an interview to CNBC-TV18, Jayesh Mehta, MD and Country Treasurer of Bank of America spoke about the bond as well as the rupee market.
Below is the transcript of Jayesh Mehta's interview with Ekta Batra & Anuj Singhal.
Ekta: What is your sense in terms of what the bond markets are factoring in terms of future rate cuts? How much and by when?
A: It has become quite uncertain at this juncture with intermittent rate cut and stuff like that. So, at this juncture, bond market after particularly yesterday's data, whatever little hope was there for April rate cut, is out. People are still expecting June rate cut, maybe another 50 basis points rate cut in the next six to eight months. June, we will have to see how it pans out because Fed hiking kind of situation somewhere around June 16th or 17th. Will they really do it 15 days before; unless the entire quarter percent or something is priced out? So that is one factor.
As of now market is not looking at it but that is one factor. So June also could look little difficult. In that situation, you are looking at the old 10-year, which will become the old 10-year in sometime in the range of 7.70-7.85 catching 5 basis points on either side. It is a lot of data related situation. You also need to see what happens on the ground economy whether the stalled projects and all that make Reserve Bank of India (RBI) comfortable. If there is work happening on that. And also on the positive side, yesterday there was some article about foreign institutional investor (FII) limit. If that comes through, the whole thing can tend down by 10 basis points. So, at this juncture, it is quite fluid market with not really any expectations sideways, depending on some trigger, news might move by 5-1 basis points plus-minus.
Ekta: On couple of points in terms of flows from the debt market - what we have been seeing is that the flows have not been continuously going out of the debt market but at least that trend seems to have begun. What are experts talking about in terms of the debt outflows at this point of time and do you think that there is a lot of caution ahead of the Fed meet on the March 17th and what that could throw up as well? Could we see it in fact increase in terms of outflows?
A: I think debt flows will continue. You might have some in between profit booking or something, but there are enough buyers waiting on sight. We have changed composition on the debt side from the investor profiles perspectives. So, they have long-term guys. If one is look at 50-75 basis point cut in next one-one-and-a-half year, these guys are all waiting to enter the Indian debt market, so from that perspective that will remain quite constructive. I really would not see much of the debt outflow happening even if you look at Federal Funds Futures that’s priced down a quarter basis point rate hike for June. So, that remaining there, unless it becomes really messy and very hawish situation globally, I do not see much of - in fact I would see net positive inflows coming in debt over a period of next six months, so that should not be a big trigger.
Anuj: Having said that, do you think the probability of the yields getting to 7.50 now is distinctly lower than what it was say about a fortnight back?
A: I would say it would eventually, but yes. If one is looking from April to June, as I said in the beginning. The range would be 7.70-7.85 stretched 5 basis points on both sides because you have a supply coming every week, starting first week of April. So, from that perspective, with supply coming in no positive trigger, the yield to go down to the repo rate would be a little difficult. But of course you have a new 10-year coming in, so that would be 20 basis points lower. So, looking at the range, I am looking at the old one, we can look at that one at 7.60-7.70 kind of range.
Ekta: A question on the Fed meet - there is a lot of talk that maybe they would sound hawkish this time in the March 17th meet. If in case that does come through and if in case there is something on a possible rate hike in the US or the visibility or a timeline of it, do you think that the Indian markets would be fairly resilient in terms of the rupee as well as the bond market or is there a chance of us now being susceptible to what the other emerging market currencies have been doing?
A: I think that is what RBI has also been maintaining. Even in the last statement, I think they added a lot of things on infra, project stalling, project implementation and all that. If by mid-June, we are able to get trajectory there, then India could be different, but as of right now, the forward projection is maybe rate hike happening in US maybe to 2.25-2.5 and if actually the projection happens at 3.25-3.5, so to that extent adjustment would happen. But as I said, if we are doing on the macro front, if the equity flows continues, equity market is doing well, of course that will be related to the ground level infra and project implementation.
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