Thirty-Year India Bond Veteran a Rare Bull Seeing a Rate Cut

(Bloomberg) -- Jayesh Mehta is going against the crowd on the direction for Indian bonds. The central bank will cut interest rates this year, he says, bucking a growing consensus that the authority's next move would be a hike.

Mehta, the managing director and country-treasurer at Bank of America Merrill Lynch, says he expects local and global data on consumer prices to underwhelm, diluting the case for tightening.

“Definitely before the year-end, I see a 25-basis point cut,” Mehta, 53, said in an interview at BofA's Indian headquarters in Mumbai. Inflation “data will not come so strong,” he said.

The 30-year industry veteran's call on inflation has proved prescient before. In June 2015, Mehta said he was confident Prime Minister Narendra Modi's government will be able to curb price gains, even as the central bank flagged inflation risks amid forecasts for a deficient monsoon. Bonds rallied over the next three months as a consumer-price gauge eased from 5.40 percent that month to 4.41 percent by September.

“In the short term, yields may go up, but I don't see them going up dramatically,” he said. “Over a one-year horizon, I am bullish on bonds.”

The 10-year yield, which reached an eight-month high of 6.99 percent this week, will slide to 6.25 percent over the next 12 months, he said. The median estimate in a Bloomberg survey of economists sees it at 7 percent by March 2018. The yield fell three basis points to end at 6.94 percent in Mumbai on Friday, helping the securities cap their first weekly advance in five.

Read: Treasury Head at Top Indian Bank Abandons Bullish Bond Bias

Yields on rupee debt have climbed since the minutes of the Reserve Bank of India's April 5-6 meeting released last month showed policy makers expressed concerns about inflationary pressures, with one of the six panel members even suggesting a pre-emptive rise in the benchmark repurchase rate.

An increase would be the first since January 2014. Capital Economics predicts policy makers will raise the repo rate by 25 basis points to 6.50 percent in December. Goldman Sachs Group Inc. sees a 75-basis point increase during 2018, while Nomura Holdings Inc. is estimating a 50-basis point hike.

‘Market Is Supreme'

“You have to have a broad macro view at the back of your mind, but ultimately the market is supreme,” said Mehta, when asked about his personal trading style, which has evolved since his association with the first-ever trade on the National Stock Exchange of India Ltd. in 1994.

Mehta is again betting on Modi to keep food inflation under check. And unlike in 2015, he may have the weather gods by his side, with the state-run forecaster predicting a normal monsoon season for this year. Bountiful rain is crucial to sustaining India's economic growth that is still one of the world's fastest.

“It is a continuing focus for them and as we approach the main election, they won't let food inflation slip out,” he said, referring to national polls due in 2019. “Even taking inflation at five percent, at a 2.5-3 percent real rate, does it make sense to own bonds? Yes it does.”

To contact the reporter on this story: Subhadip Sircar in Mumbai at ssircar3@bloomberg.net.

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani, Ravil Shirodkar