The RBI is not likely to hike key policy rates in the year ahead as its measures to tighten liquidity are non-permanent in nature, believes Sanjay Shah, head, fixed income, HSBC Global Asset Management. In an interview with Ashley Coutinho, he says inflation levels are likely to remain sticky in the year ahead.
Yields have shot up substantially since July 15. Do you see them stabilising in the near term?
Yields have moved up by 75-100 bps in the long end of the yield curve (6-30 years) and by about 200 bps in the less-than-five-year segment. This is largely due to the liquidity tightening measures and increase in overnight rates by the RBI. Bond market yields have stabilized at about 8.20-8.40 for 10 year g-secs, based on the fact that the RBI has opened a window for open market operation purchase to support the long-end of the yield curve. The fate of yields is tied to some extent to the currency as monetary policy is used as a defence in the currency space. Thus, yield stabilization will also depend to some extent on the currency stability.
RBI has announced an R8,000-crore bond buyback programme to ease liquidity. What impact will the move have?
The RBI’s decision was primarily announced to check long term g-sec yields, which had significantly surged by around 200 bps post the announcement of tightening measures. It is not likely to impact the system liquidity notably. However, further announcement of OMO purchases and tweaking in CMB (cash management bills) issuances may impact liquidity positively. We had suggested that the August announcement would positively impact long-end funds, which has turned out to be true. It must be noted that the recently issued cash management bills are designed to mature in mid-September in order to negate the seasonal tightness in liquidity arising out of tax outgoes.
How do you read the trajectory of interest rates in the year ahead? Any likelihood of a hike in key policy rates?
We do not think the RBI will hike policy rates as the liquidity and overnight rates measures are clearly targeted towards stabilising