The bond markets are presenting an interesting position. Bond prices have been going higher and bond yields head lower for incessantly past two week.
There have been handsome gains of about Rs 4-5 (from the lows that bond prices reached four-five weeks ago) for bond prices. Ashish Parthasarthy of HDFC Bank expects 10-year bond yields to be in a broad range of 8.25-8.75% from now till March.
He also mentioned that a cash reserve ratio (CRR) cut is reasonably expected. Moreover, his forecast for the credit growth is around 17-17.5%.
Here is the edited transcript of his interview to CNBC-TV18. Also watch the accompanying videos.
Q: What is the market pricing in at this point in time? At 8.42%, is the yield telling you that a CRR cut is getting priced in on Friday?
A: There is a reasonable expectation of CRR cut. That is not the only thing which has been priced in. The IIP figure came quite low. It�s very clear that the next monetary action would be to ease monetary policy. RBI has been aggressively conducting open market operations (OMOs). All this put together are driving the bond yields to new lows.
Q: If there is a CRR cut and inflation number tomorrow comes in lower than perhaps 9%, it would be positive. On the other hand, the negatives are probably a higher borrowing program from the government in the next quarter. Can bonds go back to 8.6% levels? Can they slip to 8.25% levels? What range are you looking at for one quarter now?
A: The broad range would be 8.25-8.75% from now till March. I will not be surprised if they touch 8.75% depending on the kind of surprise from the additional supply or broad borrowing program.
Q: There is a tight liquidity squeeze in the market. How much more by way of OMOs do you expect from the government?
A: In the last financial year, RBI effectively bought around Rs 67,500 crore in OMOs. Given the size of the borrowing program and the liquidity situation, I would expect RBI to buy OMOs at least to that extent of what they did last year or maybe slightly more. This would be to enable the borrowing program to go through smoothly without adversely impacting liquidity or yields.
Q4: What is your range for the month for bond markets if the reserve cut comes on Friday and if it doesn�t come? If it doesn�t come, does it go to 8.6% or will it be supported at 8.5%?
A: It can go to 8.6%. For this kind of month, I would put the immediate range at 8.25-8.30% to around 8.6-8.65%.
Q: What about bank balance sheets? On September 30, the market closed at 8.44%. Will there be decent treasury gains for banking stocks for this quarter?
A: I don�t expect very large treasury gains, but there would be some treasury gains this quarter.
Q: For the next quarter, what kind of lows can the markets go to? In January, will 8.25% comes pretty soon?
A: If 8.25% comes, it will come in the next one month. After that, it is difficult for it to come because the larger or higher borrowing program would put a floor to the yields.
Q: What are you pencilling in by way of credit growth? Much of the bond buying appetite will depend on how credit off take happens. Will it fall from 18% to 17-16%?
A: Our forecast for the system is at around 17-17.5%.
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