Market is pricing in a 25-50 bps rate cut by RBI: R Sivakumar, Axis Mutual Fund

Volatility in the rupee will remain contained, said R Sivakumar, Head - Fixed Income, Axis Mutual Fund. In a chat with ETNow, he shares his views on RBI's expected monetary stance, demonetisation, currency moves, bond market, and more. Edited excerpts:-


ET Now: The broad question that I have is that while this small blip happened in yields because of the CRR move that the Reserve Bank has done, do you believe that the larger trajectory being downwards, we will see some definitive activity. Maybe we'll also see a dovish commentary in the Reserve Bank policy meet. Is the market pricing in such a scenario?
R Sivakumar: The market is now going into next week with a lot more expectation than was priced in. So if you look at the price movements or the yield movements from the last policy in October till first week of November, we saw a rise of about 15 bps as the market kind of walked away from a December rate cut.

But I think, now the market is perhaps pricing in a 25-50 bps cut. There is lot of expectation from the RBI. My own feeling is that even if the RBI does a 25 bps cut but gives a very definitive dovish guidance, market may continue the rally because you have to remember that this demonetisation move has a positive impact on bond markets. Overall in the near term, we expect bond yields to remain trending a bit lower.

ET Now: Do you believe that this CRR measure could get extended beyond December 9th? Does that have any kind of implication on the short-term behaviour for the yields which also be digesting the impact of RBI policy?
R Sivakumar: Yes, I think a really interesting thing is the timing and the quantum that they have announced this year takes out about 3.2 lakh crore from the system. But we need to remember that about more than Rs 6 lakh crore has come into the RBI net. That is Rs 8 lakh crore of total deposits and about Rs 2 lakh crore of withdrawal. So about Rs 6 lakh crore has come in.

Now the RBI is holding government bonds before this demonetisation move was about 7 lakh crore so what that meant is that with about 6 lakh crore of cash coming in the RBI was really nearly running out of GSec to sterilise these kind of flows and this is a reason for the CRR increase.

We do expect that the RBI will need to take some steps to ensure that they have control the money markets. We need to figure out some solution to ensure that the rates in the money market are contained close to the official repo rate. So we do expect some monetary action by the end of this reporting fortnight December 9th.

ET Now: What is your view on the currency given the kind of acute volatility and pressure that we have seen so far on the rupee?
R Sivakumar: The currency is remarkably stable and you need to look at the dollar strength and emerging market weakness over the last few weeks.

We believe that the RBI is managing the volatility of the currency. So the rupee is reasonably strong despite FII selling in both debt and equity. The rupee is nearly stable.

So our expectation is that volatility in the rupee will actually remain contained. There will be some pressure from time to time as you have seen in the recent past when the dollar has been very strong. It does appear that the RBI has very firm hand on not allowing volatility to creep into the forex markets.

ET Now: Let us talk a little bit about what the Axis MF view is in terms of allocating incremental funds across for short- and long-term duration. How exactly would you look at allocation?
R Sivakumar: The view in long bonds versus short bonds is actually a little bit different in terms of time horizons. We believe that long bonds perhaps will outperform in the near term because the forces which are driving the G-sec market are to do with the fiscal and the near-term monetary expectations from the RBI.

The view on short bonds is little bit more structural because that is driven by an expected improvement in the overall banking system balance sheet for two reasons; 1) one of course is that you have got this big flood of liquidity which has come in by way of deposits but also in the medium term you do not expect the same amount of cash to leave the system.

On an annual basis we have seen Rs 1.5-2 lakh crore of money leaving the banking system which is what has been leading to this tight liquidity condition and lack of transmission of rate cuts. Now our expectation is that if this were to ease going forward, then the short-term story for bonds maturing in less than five years is more of an enduring trade.

Therefore we are telling investors that if you want to invest in bond markets with a medium-term view, the best asset class right now is short and medium term bonds.

ET Now: What is your outlook on crude oil prices?
R Sivakumar: We are looking at broad ranges rather than the narrow moves. From a bond market perspective, I think it will be interesting to see if oil breaks above 60 or 70 and then you start worrying about the inflationary impact. But until that happens, to be honest I do not think oil is going to be on the agenda for the bond markets in the near term.