Bond market likely to open with 4-5 bps hardening: UTI MF

Some knee-jerk reaction is expected following the news of Reserve Bank Governor Raghuram Rajan unwilling to head the central bank for second term, says Amandeep Chopra of UTI MF.Bond market is expected to open weak with a 4-5 basis point hardening, he says. With Rajan exiting, worry will be over inflation targetting and focus will be more on currency market. Overall strategy of the Rajan’s successor will drive the rate cut scenario in the country. If inflation rises again, some concerns will come back into the economy. Below is the verbatim transcript of Amandeep Chopra's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: As a bond investor, what is today's worry, if that is not much, what is the view up until end of 2016?A: Bond markets will open a bit weak. We expect 4-5 bps hardening of the yield on the 10-year but I think the worry while you will have a knee-jerk reaction to the events over the weekend, key worry will again remain around both the new governor as and when the government appoints it and his thought process especially around the two key issues that we have seen the incumbents talk a lot about, primarily around inflation targeting and how rigid is the central bank going to be around inflation targets. Secondly also in terms of the focus on currency, we have seen a fairly stable rupee all along under this regime and given the fair amount of stability that India has seen both from foreign institutional investors (FII) as well as from domestic investors on some of the key stable macro parameters, I would expect a lot of focus on these.Sonia: In the very near-term I didn’t get the view on the bonds itself, at 7.5 currently what kind of move do you see on the bond yields in the very near-term?A: I would expect the yields to harden a little bit, we are looking at sort of coming very close to the previous highs which was 7.55 so about 4-5 bps hardening from here. I think at that level, you could see fair amount of interest coming in. I don’t expect a very aggressive sell-off right now. I think I would expect a lot of institutional investors domestically to see some value at that level and buy in.I think it is still too early to call for a strong sell-off in the local bonds simply because unless you have clarity on the person who comes in to replace Raghuram Rajan and his thoughts and his overall strategy whether there is any change or not, that will drive more of the medium-term to long-term rate movements.Latha: Is there just a feeling that it could be positive that you would have someone who would be more liberal with liquidity as well more liberal with rate cuts and therefore it is a time to buy bonds?A: Even if you were to see some degree of liberal views on some of these, I think you will still have some stronger medium-term reactions. So if you were to cut rates and ease liquidity further from where we already are then possibly you will also have to then dilute your medium-term to long-term inflation focus because you cannot have both. In that sense maybe you could see a near-term rally because these two events drive a fair amount of buying but if you start seeing inflation hardening, you will again start seeing inflation at the upper end of the corridor then I think there will be some concern creeping back in and on that backdrop you will see maybe some return.