See bond yields consolidating at 7.60-7.80% for now: Nomura

Latha: More legs for this rally or do you think that now you will have to wait for the government to announce that foreign institutional investors (FIIs) can actually buy?

A: I broadly think that market should consolidate at current levels. I think 7.60-7.80 percent range on a new 10-year benchmark is something which we should expect. It should be seen in the context that after Reserve Bank of India (RBI) policy meeting we had a big sell-off in bonds. So, it is the combination of positive news in terms of good progress on monsoons, dovish Fed and then this FII limit. So, it is a combination of that news that has put us back to levels where we were when we went into RBI meeting. So, one should expect some consolidation around current levels but then a gradual rally from thereon.

Anuj: Do you have any kind of targets on the benchmark yield for example?

A: I think 7.50 percent is my target on the old 10-year benchmark which is trading 15-17 basis points above the new 10-year benchmark.

Latha: What would you expect the new 10-year to do?

A: I think if old 10-year benchmark goes to 7.50 percent, ultimately we will see 7.30-7.40 percent range on the new 10-year.

Latha: Would this require that FII door to be opened or definite signs of monsoon progress and therefore market hopes opening up for a rate cut?

A: I think we will slowly move away from the rate cut expectations. We should see compression between the 10-year bond yields and the policy rate with time. What matters for spread compression is improving supply-demand equation. From valuations perspective, market needs surety that there are no upside risks to inflation. If that gets confirmed then the supply-demand equation will drive bond yields.

Latha: Which supply-demand are you talking about, is this the supply-demand for government securities (GSEC) or supply-demand for credit?

A: I am talking about supply-demand for government securities. So, for example, this opening up of FII limits if materialised or if FIIs are able to invest up to like another Rs 350 billion on GSECs for example and in the second half of the year which is typically a lower net supply part of the year, we should see a gradual decline in bond yields.

Anuj: What kind of inflows would you expect if the limit is opened up and do you have any number in mind in terms of the kind of appetite that would be there for Indian paper?

A: Ultimately the appetite of high yield or appetite of Indian bonds would broadly be dependent on as I said how the macro in the India moves, how comfortable we get on the inflation number – one. Two, what is the appetite for bonds in the overall market. So, for example, if I assume that the global fixed income market volatility remains subdued then I expect a decent amount of interest in Indian bond markets. I see no reason why FIIs will not invest in India.

Latha: As of this moment if it opened today what would be the interest?

A: If you see, GSEC limits are full. In fact I would think there would be good interest at current levels or in the current environment.

Latha: Finally, a word on the rupee, is there more to go or do you think it is dangerous to short the dollar at these levels?

A: The rupee overall we are constructive but we see more as an outperformer. I think in case of rupee it is RBIs behavior also which is important. Nevertheless, one should expect a range bound kind of a market but we expect it to be outperformer.