RBI will target neutral liquidity through combination of OMOs and forex intervention, said Amandeep Chopra, Group President & Head of Fixed Income, UTI MF.
Even as global bond markets are in the midst of a raging rally and are considered by many as being in a bubble, an Indian bond market veteran thinks the local market stands on solid fundamental grounds.
In an interview with CNBC-TV18, Amandeep Chopra, Group President & Head of Fixed Income, UTI MF, said the Indian bond market is well supported by macros as well stance of the Reserve Bank, such as its activities like open market operations (OMOs).
Chopra told CNBC-TV18 that there appeared to be a change in the policy stance by the Reserve Bank of India (RBI) under the new dispensation, and so, there is every chance of one more rate cut by the end of this fiscal. This will be supported by decline in headline CPI in December, he said.
"Yesterday’s policy statements showed some of the paradigms which RBI earlier focused on have moved," he said. "However, yesterday’s rate cut was priced-in by the markets."
Chopra expects the 10-year bond yields to be around 6.5 percent in the next three-four months. The yields were trading around 6.75 percent post the RBI policy.
On the liquidity front, Chopra says there was no change as far as the RBI’s tools for liquidity management were concerned. “RBI will target neutral liquidity through combination of OMOs and forex intervention,” he says.
Below is the verbatim transcript of Amandeep Chopra's interview to Latha Venkatesh and Reema Tendulkar on CNBC-TV18.
Latha: What is your reading, at the moment there are minor gains in the bond markets, but could we see much more by December or March?
A: Clearly, there has been a significant shift as far as the stance of Reserve Bank of India (RBI) is concerned towards monetary policy. We were earlier pencilling in one rate cut and an outside chance of one more.
Clearly, yesterday's policy statement has clearly shown that some of the benchmarks have moved, some of the paradigms, which RBI earlier focused on have also moved. So clearly, we are now looking at another rate cut before end of the financial year. That will be supported by decline in headline consumer price index (CPI) that we will see as we go towards December. So it will be fairly supportive for another rate cut.
Reema: Any range on the bond yield that you would like to give us today, it is 6.75 versus 6.71 yesterday, so it has moved up despite that rate cut, what would be the call on the yields now?
A: The rate cut yesterday was well anticipated by the markets. If you look at the run up to the policy, clearly, the markets had reached pre-surgical strike event. So while there was view among the economists that there will be no rate cut and a pause possibly by RBI, the markets had fairly priced in.
So they were not too surprised with the event. Today clearly we are seeing some bit of profit booking, so in interim term, you may see markets move in a very narrow range of 2-3 bps but as and when you see some degree of consolidation, markets will again start looking at the next event. So like I said, you cannot discount another rate cut from RBI and they clearly set path for that.
Latha: There was some trepidation that the liquidity policy of the RBI could change in a bit especially because we didn’t know Dr Patel's hand, after this dovish slant, what is your take? Is liquidity going to be friendly?
A: I would think so. In the post policy call, we did reiterate that there is no change as far as their tools for liquidity managements are concerned. They are going to target neutral liquidity through combination of open market operations (OMOs) and foreign exchange (fx) intervention. So from our perspective, we have not seen any shift as far as stance is concerned. We will see anything between USD 900 billion to about a trillion worth of OMOs still for the rest of the year.
That in our view will at least be fairly supportive. Second half sees fair amount of liquidity tightening because of cash and circulation increasing so a good part of that will be offset through OMOs. We have not seen as aggressive FPI flows this year. So the onus on trying to bring liquidity into the neutral zone will lie largely on OMOs.
Latha: Therefore two questions -- give us some idea, 6.5 in the next six months for the tenure and the second question, exactly the global cues? Everyone has been talking of the bond bubble, we have seen enough falls because of global pressure, can that reverse now?
A: In terms of the range, clearly with another rate cut expectation, we do not discount 10-year touching 6.5, so I think 6.5 in our view is a reachable target for 10-year over the next three-four months.
On the global front, there has been a fair amount of trepidation as far as outlook for bond markets are concerned. It is largely driven by fairly aggressive quantitative easing (QE) and low rate policy followed which now is being questioned since they have not seen commensurate improvement as far as the economic growth is concerned.
For India, the situation is quite different. We are not looking at any sort of a bond bubble here, we still see fairly active and larger real interest rates spread even if you take into account the 125 bps spread. Furthermore, if you look at concern for India, it will largely remained around -- if there is some degree of risk reversion coming in from global investors then you could see a couple of billion dollars being pulled out which could in a very short period of time create a bit of a turbulence but domestic demand is fairly strong, net supply has been to some extent reduced because of OMOs. So I don’t see a meaningful risk for Indian bond markets presently.