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Expect 10-year in 7.70-7.85% range in near-term: Nomura

In an interview to CNBC-TV18, Vivek Rajpal, Rate Strategist, Nomura shares his views on bond yields, rate cut and rupee. He expects the 10-year to be in the range of 7.70-7.85 percent in the near-term. He believes rupee is likely to remain range bound going ahead. 
Below is verbatim transcript of the interview:

Q: The yield has hardened again. It was 7.65 percent on the day of the last rate cut, had gone to about 7.80 percent or thereabouts and then yesterday there was about a 5 basis points hardening. What is your view now; from hereon what could be the likely trajectory?

A: Yields are expected to remain range bound in the near-term. I am expecting the current 10-year benchmark to be in the range of 7.70-7.85 percent in the very near-term. The Reserve Bank of India (RBI) policy yesterday has taken out the expectation of front loading of rate cut expectations.

However, in the coming month we will see a few technical factors favouring bond markets again such as announcement of a new 10-year bond, improved liquidity in the banking system, etc which will trigger the rally. However, in the very near-term 7.70-7.85 percent is the range which I am expecting.

Q: The 10-year is currently at 7.79 percent, what do you think it is factoring in, in terms of a future trajectory of rate cuts?

A: I think it is not pricing in any rate cut, I think it is pricing in if anything a very miniscule chance of a rate cut. Something like 20-25 percent chance of a rate cut is what is in the price.

At the moment it is just not about rates that is getting priced in, there is a lot of uncertainty, there is a supply concession in the curve, this is an older bond so there are other technical factors that are impacting the market rather than the rate cut expectation. Nevertheless, even at current levels I don’t think a full rate cut is in the price.

Q: Can you give us your perspective on how important the March inflation figure would be for the bond markets? Do you think that would be enough of a move if in case it does surprise on the downside if there is not much of an impact of unseasonal rainfall coming in?

A: The most important data to track is inflation trajectory because ultimately that is something which will determine the repo rate expectations in the market. If it surprises on the downside the market will take it positively. However overall, the broad expectation of the market is that the inflation trajectory is in a 5-5.5 percent kind of a range.

What the upcoming inflation numbers will tell us is how much is the impact of unseasonal rains that we are seeing and whether that is able to push back the rate cut expectations further or not. So, it is pretty relevant and just not the next reading but two or three readings are important to even gauge the underlying trend in inflation.

Q: A word on the currency. The rupee has been quite range bound now for some time, do you expect any kind of breakout or breakdown on that?

A: In the near-term the rupee will remain range bound. Nevertheless it is important to understand that rupee is actually outperforming rest of the currencies so in a way it is an outperformer. Given the fundamentals of the country it is expected to remain an outperformer. However, from an overall perspective, it is expected to remain range bound.


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