The RBI is likely to cut interest rates by 25 basis points in the upcoming credit policy in April, says Neeraj Gambhir, Managing Director, Head Fixed Income, Nomura India. He feels it could be even more if the RBI feels that the downtrend in consumer inflation is sustainable, though the possibility of that is slim.However, the market has already priced in a 25 basis point-cut and will be watching for the language of the RBI commentary in the credit policy, Gambhir says in an interview to CNBC-TV18.He says the RBI decisions in the credit policy will also be based on the liquidity situation. Gambhir expects at least two open market operations (OMOs) by the RBI by December. Below is the verbatim transcript of Neeraj Gambhir's interview with Latha Venkatesh & Reema Tendulkar on CNBC-TV18.
Latha: One thought we would at least get to 7.45 after 50 to 130 bps savings rate cut. Not so much of a reaction?
A: The market has already shown quite a bit of reaction since Budget. If you look at 10-year bond yields, they have rallied almost 60 bps since the Budget day, so it is a continuous move that the market is showing. If you just look at this particular days' movement, it is about 3 bps odd. I think we are still in a strong timeframe for bonds. There is a monetary policy which is expected to cut rates by 25 bps in the first week of April. We have seen the new borrowing programme, calendar being announced which is supportive of backend of the curve. So this is reasonably good time and bonds are steadily rallying and they have been rallying for the last month or so.
Reema: What would be your three month target on bond yields from the current 7.48-7.47?
A: The key events that the market was looking for have materialised, Budget has been good. Going forward we are going to look at the monetary policy, we are going to look at the consumer price index (CPI) data over the next two-three months and how does that play out and also how things play out on the global front. I think for the time being it feels like that we are at the lower end of the range as far as yields are concerned. In April we will get going with the borrowing programme, new supply will start hitting the market and market will have to start contending with it. So I would think that it is going to be pretty range bound from here onwards but depending upon how the monetary policy plays out. I think that will have a lot of bearing on how the bond markets perform going forward._PAGEBREAK_
Latha: When do you see liquidity easing? What is the current deficit in the market, when do you see it easing?
A: Current deficit - it's pretty high right now because of the fact that there is an advance tax payment that has happened and money is sitting in government's cash balances with Reserve Bank of India (RBI) and once this money starts getting spent, which will happens in the next fiscal, you will see a significant reversal in the liquidity situation. We are expecting at least one more or maybe two more open market operations by RBI by the end of this year to further address this temporary liquidity deficit that is in the system but the real addressal of this issue will happen in next year when the government will start spending the money.
Reema: If we get 25 bps rate cut from the RBI, is it completely priced in, in the bond markets already?
A: I would think so. I think the market has moved in and priced in 25 bps rate cut. The focus will be on the language that goes along with the rate cut. If we have a rate cut, the market will definitely focus on what is the forward looking view whether it's a pause, an extended pause or whether we can look at some further reduction in rates depending upon data. I think that is the key message the market will look at.
Latha: What are you expecting from the credit policy and what would you like from the credit policy?
A: The issue besides the rates is the liquidity situation. I think there has been a lot of discussion in the market, in the media with RBI on this particular issue. I do feel there is a need to comprehensively look at how the liquidity is getting managed and also the impact that government cash balances are having on the monetary policy transmission of RBI. So that requires a comprehensive review in my opinion and we will look at some statements to that effect whether some short-term measures plus some long-term thought process. I think that is something which is very crucial.
I will also look at some discussion around the entire non-performing asset situation in the banking system and how the banking system is going to evolve going forward. I think that is an important discussion point. Given where we are currently and the impact it is having on credit creation in system. I think there is a need to have a lot more open discussion around this issue. So that is the second important point. These are the two key points according to me that potentially the policy could talk about.
Latha: What are you expecting by way of rate cuts and what would you like by way of rate cuts?
A: Our expectation that we have put out is 25 bps. I think that is the space that we have, probably they could do a bit more if they feel that the current CPI reduction is sustainable but the issue there is that the core has not come down, only the headline CPI has come down. So we need to see if that sustains but given all that has happened around Budget, around CPI, around global markets, it is a case for 25 bps rate cut.
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