Bond market has a little sell off coming in: Jayesh Mehta, BOfAML

In a chat with ET Now, Jayesh Mehta, Bank Of America - Merrill Lynch, says looking at the way the world looks today, any volatility would be short lived. Edited excerpts


ET Now: How would you look at the policy stance going forward? A window of opportunity for further rate cuts has been kept open. The RBI Governor and the MPC sounded more dovish than expected. But adding the foreign angle, we are looking and very closely monitoring what the Fed does in December. If Fed does hike rates and sound hawkish, would RBI’s plan change?

Jayesh Mehta: Post policy announcement, the governor mentioned US Fed action as well as US elections can create some volatility globally. They would definitely look at it but looking at the way the world looks today, even that volatility would be short lived. From that perspective, if you look at overall growth, demand, inflation outlook, it does not look like it is going anywhere. From that perspective, it will be wait and watch stance for a central bank to actually say that they will take a firm view. Right now, it is little difficult but definitely once they wait and watch and as the things pan out, the market will not move away anywhere in the sense growth and inflation not move anywhere dramatically.

Mythili Bhusnurmath: Are you a little surprised with the RBI cutting the rates? I am not talking about the merits or demerits of it but given with their commentary which says that inflationary expectations have actually moved up is their action contrary to what inflationary expectatiosn are signalling?

Jayesh Mehta: I do not know whether that is right because if you look at the policy statement where it says upside risk to inflation remains, it is definitely lower than what it was in last two policies. So from that perspective, I am really surprised it has happened and that is where the bond markets has a little sell off coming in. The markets still not customised to getting a very crisp short statement and short interview. So, that is going to take its own little bit of time.
If you really look at RBI’s stance, it says very clearly the upside risk is there to the inflation of 5% target for March 2018 but it is definitely much lower than what it was in last two previous policies. So it is a little surprising people are reading various factors in it.

ET Now: A lot of people say GST is inflationary in the first year and government sources yesterday said they are working with a April 2017 deadline. Also, with the pay rises and a few others things going, WPI in all probability in about nine to 12 months should be higher than where it is right now. Is the RBI and the MPC betting too much on a favourable monsoon bringing down prices of food articles because typically food inflation has a tendency of surprising on the upside more than the downside?

Jayesh Mehta: Somewhere in the policy it is also mentioned. Apart from rainfall, the government has done a good job on the supply side management of food. I think that is very crucial. One of the things you can look at is last two years one of our biggest challenge on food inflation apart from the logistic and infrastructure has been sudden spike in food prices. Now that has been controlled quite well and especially in the last six months it has been done very efficiently.


There will be enough effort by the government to control food side inflation. WPI might rise a little bit. We have a India growth story going on but let us not forget the global environment. IMF has forecast that trade volume will actually come down and not trade value. When there is so much of excess capacity, globally standalone inflation in India could be mostly food situation which was managed pretty well.

ET Now: Under the earlier governor, there was a concerted effort to push corporates towards a corporate debt market. But now, just a few days ago Deputy Governor Gandhi came out categorically and said the corporate debt market can never compensate for bank credit and he cautioned against putting too much hope on corporate debt. Is this again a welcome realisation like the pragmatism we are seeing now on NPAs?

Jayesh Mehta: Absolutely. NPA is a different issue. Multiple factors created NPAs. But assuming somebody is doing his credit analysis well, whether it is a bond or a loan he would do his credit analysis pretty well, the lender or investor. I think let us not mix up with the NPA per se but to put a benchmark that if somebody is borrowing more than Rs 10,000 crore, 50% of the next year’s borrowing has to be in bond market which would be okay.

To force that, especially in a situation like India where the investors, the individual money, the AUM is actually more with banks and deposits rather than mutual funds and other categories. So if that shift happens from the depositors side to insurance and mutual funds, it will automatically move to the bond market.