The bond market has been relatively buoyant the past few days, despite not-so-encouraging macro fundamentals and weak global cues. Shobhit Mehrothra, head of fixed income at HDFC MF, explains that this is because the bond market is pinning its hopes on the start of the fiscal consolidation process by the government.
We have all been waiting for the Presidential elections to get over and the process of fiscal consolidation to begin with a fuel price hike, diesel price hike and that in turn would lead to 2% subsidy cap which the Finance Minister had mentioned in the Budget that they would endeavor to meet, he said in an interview to CNBC-TV18.
However, the lack of actual policy measures still casts a shadow over the market. Especially with crude prices rising again, if the government does not act on a diesel prices or fuel prices, and if the Reserve Bank keeps interest rates unchanged, Mehrotra says bonds could see a sell-off. We could see yields rising by 10-15 bps, thats a distinct possibility, he said.
From a one year time frame, Mehrotra sees the 10 year bond range around 8-8.25%. However, he says that this is dependent on inflation and steps taken for fiscal consolidation.
Below is an edited transcript of his interview with Lathe Venkatesh and Ekta Batra.
Q: What exactly is the bond market or the 10 year factoring in at 8.07%?
A: One major factor which the bond market is right now looking at is the beginning of the process of fiscal consolidation. We have all been waiting for the Presidential elections to get over and the process of fiscal consolidation to begin with a fuel price hike, diesel price hike. That would in turn lead to 2% subsidy cap which the Finance Minister had mentioned in the Budget that they would endeavor to meet. So the process of fiscal consolidation beginning in earnest is what the bond market is been pinning its hopes on.
Q: If we dont get to hear anything on fuel hike anytime soon, will the market perhaps give way