See 10-yr yield in 8.40-8.60% range in short term: BoA

He sees 10-year yields staying in the range of 8.40-8.60 percent in the short term.

Below is the transcript of Jayesh Mehta’s interview to CNBC-TV18’s Ekta Batra and Anuj SinghalEkta: I have been speaking to a couple of traders about the bond markets and they have been talking about how a possible scenario of a ratings upgrade could be actually keeping the yields quite buoyant or firm. Is that true, is that something which is doing the rounds as a possibility?A: At this juncture the ratings are with negative outlook, the way India’s story has changed and if they don't make it stable or positive outlook then when they will do it. So from that perspective it is a matter of time they will have to change the rating, I am not sure about whether they upgrade the main rating from BBB minus but at least the outlook which was negative can be made at least positive. More than neutral it is positive outlook, that is something we should expect very soon to happen. It will be sad if they don't do it very quickly.

Ekta: Is that already factored into the yields you think or may be we could see more of an upside if in case the buzz gets louder?A: As far as yield locally is concerned yes there is a bias for yields to go down but having the inflation target for January 2016, that is what is keeping people going all out gung ho about softening on the yield. So till something changes on that, people will be cautious so to that extent it can go to 8.40-8.35 but beyond that I don't think at this juncture at least for the short run. So for the short run 8.40-8.60 is the range. But one thing definitely there is we are not going to go back to 8.75-9 levels very quickly unless something globally happens or some other negative news happens. At this juncture we are at a stable range. Of course they have reduced the supply for the first half, all the auctions now like Rs 12000 crore which also we need to see whether that reduction as of now will borrowed in the second half. Now whether that will actually be borrowed in the second half or not that is something we need to see. Hopefully first week of October when we have the policy may be that is where if we see any change in stance then definitely we will see further downward movement on the yield.

Anuj: What about the currency equation because we have seen the rupee has been relatively strong, the dollar index has gone past 82 but currency here remains quite strong. What is the outlook there?A: For that we have been seeing huge flows and of course RBI rightly is buying the dollars. If they would not have been buying like today’s media report of USD 2.6 billion purchase in government securities, all the money which came in yesterday. So that is why it is still range bound 60-61.5 is the range where it is moving in as and when you have the flow but it is not breaking that range and if it would have been kept completely free it would have seen 57 or so but then that would not have been great immediately. Yes there is great India story but we still need to see the implementation of projects and other things on the macro economic side on the real economy side and hopefully we will see some movement there. We see some clearances happening very quickly, we think momentum is pretty good but at least some real project starting up lining up and actually going into production may be by last quarter of this year that is when the momentum will change. So a lot would depend. Yes it is fairly stable at this juncture, lot would depend by October policy we will actually also have monsoon behind us, whatever uncertainty, certainly behind monsoon that also will be behind us by October this year.