Bond market surprised at 50 bps rate hike: Jayesh Mehta, BoA Merrill Lynch

In an interview with ET Now, Jayesh Mehta, Country Treasurer, BoA Merrill Lynch, talks about the bond market in view of the credit policy. Excerpts:


The bond market had pretty much factored in only a quarter percentage point rate hike when the RBI put out its first quarter review today. We have seen a 0.5 percentage point rate hike come out. Where do you believe the yield on the 10-year G-sec is going to be headed from here?

The bond market was really surprised. They were really looking at a quarter percent, but now having at 50 basis points, still there is a flattening bias. There is an inward bias. It may settle down at 835 levels or so. Maybe with tomorrow’s auction, it may go a little bit higher, but otherwise it may settle down at 835. It will still remain inverted. If you look at, the OIS is still inverted. Of course that’s more of a market positioning, so that’s there. The real impact of this hike would really be felt only by the bond markets. But as everybody is talking about the bank rates, raising rates, I really wonder whether banks would be following it by a 50 basis point hike because already there is ten quarter base rate. So that’s something we need to really think about.

Last week we saw CMBs worth 12000 crores being taken up by the government. Would you say that the bond markets are pretty much factoring in as a result of these actions by the government that they will bust their borrowing limit, that the fiscal deficit is indeed going to come in much higher than what the Finance Minister continues to maintain that it will come in at 4.6?

Bond markets have factored in that, but they also have factored in that at some point of time, RBI will also have to buy bonds. So that’s kind of offsetting it for it. So I do not think bond markets are really too much worried about the excess borrowing at this juncture.

We are seeing the liquidity deficit presently at about 1% of NDTL. Now given that the expectation is that credit growth will continue to hold up at above 18% and deposit growth will run at a little over 17%. Do you expect that in the 2nd half of the current financial year, the liquidity deficit position is going to actually increased much further from where we are at present?

I do not really think so because it is a calibrated liquidity, which they are managing currently like they are having 65,000 crores at negative liquidity. Of course yesterday was an aberration but that’s an intended play. It is altogether, it’s rate hike, keeping the liquidity tight.

Looking at the rate hike a little positively, not from the equity market point of view but just looking at it a little differently, one argument is that rising interest rates is going to bring in or attract large debt capital flows, which will take up the rupee and in turn reduce imported inflation. But do you see that happening?

Yeah. Definitely with the equity reacting the way it is, to an extent it will have a little impact on that. But the major thing is we are all looking at inflation really slowing down the growth. There are two points to it. Bond market is not overreacting to the rate hike. Bond market is fairly still keeping it more or less stable and if you look at the equity market, that’s really reacting and that would actually impact the dollar-rupee view. And that would really impact the bond view later on. So it has gone into a conundrom whereas overall for a corporate, I do not think the lending really matters that much because for the large corporates, they anyway have international capital markets, which they are accessing now. They really have been successful. It is more about implementation hurdle.