Analysts expect at least 25 bps cut in rate by RBI in October policy

Choudhary and Upadhyay shared with CNBC-TV18 their expectations on the meeting between the finance ministry and bond market participants which is to be held on Wednesday.

“If we summarise what is happening both to the bond market and to the broader economy, it is largely the unavailability of adequate amount of risk capital. So despite provisioning of liquidity which, most including us thought, would solve the problem of term spread, the problem of very elevated term spread is not going away. Probably it is to do with the fact that the amount of risk capital that is available in play is much lower than the amount of bond supply that market is being called upon to absorb,” said Choudhary.

“Market still fears mark-to-market risk and therefore despite credit growth being weak, despite there being risk aversion in the system, despite core liquidity being surplus Rs 1,75,000 crore to Rs 1,90,000 crore today, you are witnessing term spreads of 130 basis points (bps) on the 10-year... we have to solve for the problem of higher term spread first and rate cuts alone as of now are not able to do so. So we have to find a way where demand were to pick up for government bonds first and then the riskier assets,” he added.

On crude prices, Upadhyay said, “We would think that $70 per barrel is a threshold where you could still get further accommodation. We expect RBI to cut their growth forecast quite sharply. In the past, they have typically downgraded growth in small chunks so it is possible that RBI downgrades the growth forecast quite significantly to sub 6 percent maybe 6.3-6.4 percent and that could form the stage for further accommodation."

In terms of growth and inflation, Choudhary said, “Monetary policy commentary has to be very clear in order to emphasise the forward guidance mechanism and the transmission that happens to bond yields because if monetary policy is two-way in commentary and is very wait-and-watch today, it will also impact the forward transmission in bond yields. So we have to pick one variable and comment around it, build policy around that.”