Samiran Chakraborty of Citi, speaking to CNBC-TV18, said the extent of open market operations (OMOs) that Reserve Bank of India has gone in for were more than what he had anticipated.The OMOs were to the tune of Rs 70,000 crore since the last policy in April.The bond yields haven't fallen as expected given the large OMOs. Chakraborty said it is a mystery why Indian bond yields haven't fallen, saying that the RBI can't do much to push yields below 7.4 percent. He also said the bond market is worried about inflation trajectory than liquidity situation. Below is the verbatim transcript of Samiran Chakraborty's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Q: What exactly would you want to hear from the Reserve Bank of India (RBI)?
A: It is the first policy after the implementation of the new framework on liquidity where RBI moved its stance from deficit liquidity to neutral liquidity. Therefore, we would like to hear a bit of an assessment of how RBI feels this has progressed over the past two months, in fact in our assessment the extent of open market operations (OMOs) that have happened, are more than what we were anticipating and also the fact that this currency circulation, which has gone up so much, what is RBI's views on that, is it now becoming more in line with what the historical average has been. If that is the case then over the next couple of months we should see enough liquidity coming back in the system and that should mean that liquidity can even turn into surplus and how the RBI would handle that situation. There is a case of OMOs being significantly changed or not. These are the issues that the market will be looking at.
Q: The amount of bonds the RBI bought is phenomenal, at 70,000 crore since the previous policy. The 10-year yield has not fallen below 7.4. You have to tell me whether there was a big difference to the commercial papers (CPs). The bond market itself did not show a genuine big fall in yields considering that 70,000 crore got bought. So what will push the yields below 7.4, what will make CP yields lower?
A: This is also another kind of a mystery, if I may call it this is also an issue of transmission to some extent. So part of the reason could simply be that positioning was already much skewed even before this was announced. If you recall between the Budget and the April policy, the rates fell down almost 50-60 bps. A part of the reason is also that people want to get a bit more comfort on how things will progress going forward and let's not forget that within this period global yields went up but Indian yields did not go up. So to that extent it could justify but it is still a bit of a mystery that why we are not seeing even with almost 60 percent of government issuances during this period being bought by RBI, there was not so much of a market impact.
Latha: What might push the yield below 7.4? Is there anything the RBI can say or do and isn't there a limit to how much bonds they can buy. Ultimately M3 cannot be completely out of whack with nominal growth?
A: At this moment, if I may take your second question first, at this moment, it is still going more or less inline and we have to understand that a large part of this M3 dynamics is also governed by currency in circulation dynamics. So we will have to see how that one progresses because what RBI is doing is almost like back to back with their currency in circulation and matching it up. However, the bond market today are worried of inflation trajectory more than the liquidity situation or the OMO buying because of very recent uptick in global commodity prices. There is fear that even with a good monsoon; you might not see inflation coming down to as much as one would have anticipated before and that is why it is keeping the market a bit edgy but if we see over the monsoon season, inflation moderating then we could see a big reaction in the market because the demand is already there from the RBI side.
Q: So the RBI cannot do much to push yields below 7.4 today?
A: I doubt it will be easy for the RBI to surprise the market on the downside today. It is more the upside risk that we will be watching.
Q: The big issue today is not rates but Rajan himself. What is the sense you are getting. If there is an indication that Rajan is not continued. Will it be very negative for market and second, which is the more likely scenario that we will be none the wiser today after the press conference then what is the reaction of the market?
A: My sense is that people are bracing to the possibility that this issue will only be decided closer to that date rather than today. I do not think anybody is coming into this policy with any big expectation of learning anything on this. There are different voices on the issue itself but investors do get it that this is something which you will probably get to know much closer to the date, not now.
Q: One important business columnist in India said that tens of billions of dollars will flow out if the Governor's tenure is not extended. You share that view?
A: It is a bit hypothetical and we have to also understand the short-term versus the medium-term issues here. It is such an hypothetical question that it is always very difficult to give a precise answer to this question that exactly how the market will react, but this is one event risk that everybody is watching very closely for sure.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
