Amandeep Chopra, group president and head of fixed income at UTI Mutual Fund and B Prasanna, head, global markets group at ICICI Bank shared their views and outlook on the bond market.
“I think the rally in the bond market has been led by a confluence of positive factors both on the global and domestic side. It is not just a question of what is getting priced in on Thursday’s monetary policy action by the Reserve Bank of India (RBI) but also from a perspective of what is happening for the macro-environment globally as well as for India. If you look at the global environment, you would see that growth estimates as well inflation estimates are crashing by the day and the yield curve remaining inverted in the US leading to fears of possibility of a US recession very soon and also oil prices having crashed from USD 75 per barrel to USD 61 per barrel giving hope that inflation will be lower going forward as well and emerging markets (EMs) flows to pick up on the back of oil prices coming down and of course the Indian gross domestic product (GDP) data which came lower than 6 percent last Friday. So on the back of all this, there are expectations of a definite 25 basis points (bps) rate cut on Thursday,” said Prasanna.
“Other than the rate cut, there are also a few other expectations in terms of what could be the rate guidance, is it going to stay neutral or is it going to shift to accommodative, what is going to be a liquidity stance, will they finally align the liquidity stance to a rate stance and what will be the voting pattern, is all the things that the market will watch out for. I guess 25 bps rate cut with some kind of an accommodative stance or some kind of a dovish stance is what is getting priced in into the market with a hope that there will be one more 25 bps rate cut going forward,” Prasanna added.
On the rupee, Prasanna said, “I think left on its own, the market is possibly going to take dollar/rupee rate little towards the left. We saw that dollar-Asia is also moving towards the left and the Indonesian currency is also performing quite well. So there also there has been an election and there have been inflows into EMs especially into Indonesia and we have also seen a lot of inflows in the last couple of weeks both on the debt side as well as on the equity side. So I think, left on its own, the rupee will probably appreciate a little more if not for the fact that the RBI has intervened over the last couple of weeks. So I guess there would be a positive bias.”
On the policy front, Chopra said, “25 bps rate cut on Thursday is more or less given. Markets today, if you look at the 10-year yield trading below 7 percent is clearly pricing in 50 bps of rate cuts going ahead now. The timing may be somewhat uncertain, there is clearly some segment of the market, which expects a more upfronting of this rate cut but I think clearly 50 bps is currently priced in. Now even if they stagger it over the day after and the policy after that, I think that will still comfort the markets. Clearly, a 25 bps in the coming policy with a very dovish commentary will keep the 10-year yield well below 7 percent going ahead. There is an outside chance of 50 bps day after but even if it doesn’t happen, I don’t think the markets will react to it adversely as long as the 50 bps direction is still indicated by RBI."“35 bps rate cut is a little odd. I guess it will be something unusual for markets. Generally, we found Monetary Policy Committee (MPC) to be somewhat more traditional and choose to do in steps of 25, so it is going to be little difficult unless you have a very strong 6:0 kind of voting in favour of slightly more than 25 bps,” Chopra added.