RBI will remain proactive on liquidity amid rupee's fall: Vivek Rajpal, Nomura

Nomura Executive Director Vivek Rajpal sees room for bond yields to ease. He predicts a breakdown of correlation between the yields and forex markets. Rajpal spoke to ETNow.

Edited excerpts:

There has been a sharp drop in CP (commercial paper) issuances for September, post the IL&FS default. There has also been that trust deficit in the system which we see playing out. Are you seeing the situation improving in the money market just yet?

So, I think clearly liquidity is in a deficit mode, but the Reserve Bank of India is infusing liquidity into the banking system and they are acting in a proactive way. They have announced Rs 36,000 crore of bond buybacks to infuse liquidity and I think this OMO (open market operations) buyback will continue every month even beyond October.


From that perspective, yes, we should see some relief in the bond markets -- both corporate and sovereign bonds. Indeed, oil prices remain the key uncertainty.

So, what is your view on how the trend would be like for the money markets -- both for yields as well as the currency?

So clearly, there has been a correlation between the currency markets and bond yields recently. The currency has been weakening and bond yields are rising. But because of the liquidity infusion, what we may see is the correlation between yields and forex will get lower over time.

In the near term, we may see quite a range-bound market in yields or in bond markets, but over time RBI will remain proactive on liquidity despite weakness in the currency which I think is a function of high monthly trade deficit. There is a scope for yields to ease. So there will be a breakdown of correlation between the yields and FX markets though I think FX will remain under pressure. The rupee will remain under pressure. Bond yields will struggle to move higher. They will gradually move lower.

Talk to us also about the CP market, the commercial paper market, and what is happening there?

It is really a matter of liquidity premium or the risk premium. So that is something that needs to watch out for. Slowly and steadily, depending on what stance RBI takes and how much liquidity RBI infuses, we should see it impacting CP markets as well.