India's Biggest Bank Is Betting Against Street on Rate Call

Updated on
  • RBI will have room to lower rates in March quarter: Nageswar
  • 10-year yield will drop to 6.75% by year-end, 6.50% by March

A State Bank of India building in Mumbai.

Photographer: Dhiraj Singh/Bloomberg

The head of treasury at State Bank of India is betting against the street. Inflation will stay anchored after the recent uptick, giving the central bank room to cut interest rates and bonds to rally, he said.

“There are no signs of structural inflation,” C. Venkat Nageswar, who is also deputy managing director at the nation’s top lender by assets, said in an interview. “We believe that there’s scope for more rate cuts in the fiscal fourth quarter and beyond.”

Sentiment toward India’s government bonds has soured recently as rising oil prices have stoked concerns about quicker inflation and dashed hopes for a rate cut. The Reserve Bank of India will keep the repurchase rate on hold through 2018, after cutting it to a seven-year low, according to most analysts in a Bloomberg survey.

“I don’t see much reason for further upside in yields and most of the potential surprises are likely to be on the downside,” Nageswar said, predicting the benchmark yield will decline to 6.75 percent by the end of December, compared with 7 percent at 2:32 p.m. on Thursday.

His forecast contrasts with a year-end prediction of 6.80 to 7 percent in a Bloomberg News survey of traders and fund managers. Yields will extend declines to 6.50 percent by March 31, Nageswar said.

Inflation will stay within the RBI’s 4 percent target, while the recent spike in yields already reflects concern about an oversupply of debt and a possible widening of the budget deficit, Nageswar said. A rating upgrade by Moody’s Investors Services last week shows a higher deficit isn’t a big concern if the cash is used to boost growth, he said.

“Oil prices are likely to be at, or near, the top for now and the uncertainty about the fiscal deficit has been priced in,” he said.

The yield on 10-year bonds climbed to 7.10 percent in intraday trading on Nov. 16, the highest level in more than a year. Bond recouped some losses on Monday, with the yield dropping the most in a year, after the RBI late on Friday announced it would cancel an open-market debt sale planned for this week.

Here are some highlights from Nageswar’s interview:

What is your outlook for inflation and the fiscal target?

  • “The threat of inflation is contained. Most of the upticks are either through volatile segments like food and fuel, or are technical in nature”
  • “The Moody’s upgrade shows that fiscal target is not a major concern as long as it is done to boost growth, and as long as the government is committed to bringing it down over a period of time”

How have your positioned your investments?

  • “We’ve been actively trading, trying to benefit from the volatility. The curve has become steep so we expect more movement in the seven-to-13-year segment, when the positive surprises come in. But given our large book, we have to be mindful of the duration that we add. So, we’ve been active across the four-to-13-year tenors”

What do you make of the RBI canceling an OMO bond sale?

  • “Banking-system liquidity has fallen off significantly, from close to 3 trillion rupees when the OMOs began in July, to less than 600 billion rupees. Continuing with it at this point would have led to pressure on bond yields” 
  • “There’s possibly a recognition that the RBI doesn’t want to push yields any higher” 

What is your outlook for global bond yields?

  • “I don’t see any surge. In fact, if you look at German yields, they have been continuously falling. U.S. rate hikes and balance sheet reductions have been mostly factored into yields”
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