Markets have already factored in another 25-basis point rise in the repo rate by the Reserve Bank of India (RBI). According to a survey by the Royal Bank of Scotland (RBS), 70 per cent of the 103 Indian institutional investors surveyed said a hike by the regulator was definitely on the cards.
However, RBS feels the effect of the rate rise has only been visible in terms of the rising yields on government securities (G-sec). “People had expected G-sec yields to be around 8.4-8.5 per cent. But now, the yields are likely to overshoot expectations, since another rise in the repo rate is being expected,” said Ramit Bhasin, managing director and head (markets), RBS.
Bhasin said though the country's liquidity situation was comfortable, investors were waiting for the yields to peak further. “Despite the comfortable liquidity position, the investors are waiting for the yields to peak, in order to avoid marked-to-market losses, and this was made clear when the bonds devolved,” Bhasin said.
While the in-house stance of the bank is that the regulator would pause, Bhasin feels differently, and his view is in line with market expectations. “Core inflation is beginning to ease, the investment atmosphere was dull and the slowdown in demand was visible, which makes a case for a pause,” Bhasin said. However, if RBI pushes the pause button, G-sec yields may rally by 25-30 basis points,” Bhasin added.
Median responses suggest the 10-year G-sec yield would hover around 8.7 per cent by December, but would decline to 8.5 per cent by March 2012. “This is based on a survey of the overnight indexed swap market expectations, which suggests after RBI's last rate rise of 25 basis points, there would be immediate cuts in the repo rate by 50-100 basis points,” Bhasin said.
On the investment outlook, the market head said there was a need to resolve policy issues, or else foreign institutional investors may not return. “India's growth story may become old if policy issues are not taken care of. Investors are losing confidence and FII flows have been flat,” Bhasin said.
