Indranil Sen Gupta, Economist, Bank of America Merrill Lynch, says gilt yields are peaking, despite the panic sell-offs. 

In a note to clients, he says that they expect that the 10-year yields (currently at about 8.63 per cent) should come to about 8 per cent by March 2014. 

Open market operations

BoAML expects the Reserve Bank of India to conduct open market operations (OMO), or buying of gilts from banks, worth about Rs 1.6 lakh crore to support a loan growth of about 15 per cent.  RBI’s OMO has been almost entirely neutralised by FX intervention.

BoAML also expects the new governor Raghuram Rajan to eventually rollback the July 15 tightening measures if the rupee settles down at about 65/USD. 

Growth cut

It has cut FY’14 growth down 120bp to 4.6 per cent since July 15. The report added that FX intervention to support the INR should create greater scope for OMO to offset the fiscal slippage estimated to be about Rs 20,000 crore due to depreciation.

BoAML does not think that RBI has a lot of time.  It said in its note that “a Re 1 of OMO injected today will take about six months to generate about Rs 5 of deposits. This will take us almost to the end of the busy season of October-March. As it is, M3 growth, at 12.2 per cent, is running way below optimal 15-16 per cent levels. Not surprisingly, India is that rare economy in which lending rates are still close to their 2008 peak. It is for this reason we have cut FY’14 growth down by 120bp after the July 15 measures were announced.’’