Parthasarathi Mukherjee, president, treasury and international banking, Axis Bank, believes the bond market may have seen the worst and yields may have peaked. Mukherjee in an interview with FE?s Samie Modak says that there could be softening of yields post September with clarity on the monsoons and comfort on interest rates.
The yield on the 10-year benchmark has come off its highs of 8.45%.
Yes, the rally was actually overdue. What kicked it off was the apprehension of an economic slowdown and now the market is comforted by the fact that if the monsoons are normal inflation could cool off. The market believes RBI may have run its course as far as tightening is concerned.
If I were to stick my neck out, I would say first signs of softening could be seen post-September as by then hopefully we?ll have a satisfactory monsoon and some degree of comfort on interest rates. Also, the government will raise most of its borrowings in the first half of the year and having done so borrowings would have run their course by November or at the most December. We don?t anticipate the government overshooting its borrowings limits.
What is the market watching out for?
Clearly, liquidity is one vital factor and secondly, there is the fear of additional supply of government paper. Above all there is the overriding concern on inflation which will decide everything in the long run.
Where do you see the rates headed?
It is not inconceivable that we could see 8.45% levels again, that is a fair possibility, though I think the markets are now reconciled to the view that probably in the near term we have seen the worst. I wouldn?t put the 10-year much above the 8.25% over the next three to six months. Thereafter, I would anticipate a rally and over the next one year period I wouldn?t rule out 7.75% levels.
What do you think RBI will do June 16?
I think there is a 50% chance of a rate hike and there is a possibility that RBI could take a pause for one meeting, then hike rates the next time. But my sense is that RBI will rather get through with all of it now, by front loading the hikes. We are looking at a hike of 25 basis points and the market has largely discounted this.
What is your call on the rupee?
About a month back it seemed the rupee was running away above 45, but subsequently we have seen a correction, the rupee has gained considerably. It?s difficult to take a call but I am looking at a range between 44.5 and 45.5 for the next one year.
Issues of CPs have been rising. What is your take on it?
It?s not unusual to see such CP issuances at this time and whatever we are seeing is par for the course, really nothing unusual. As far as CD issuances are concerned, banks traditionally issue CDs at this time. The only point is some banks prefer to issue shorter term CDs and that would, to some extent, depend on the appetite of various investors like insurances companies and MFs.