Ajay Mahajan of Yes Bank [Get Quote] says that the bond markets will view the credit policy positively.

He adds that the rupee is likely to strengthen further to 46.75 against the dollar.

He also says that the policy suggests that the RBI will be pre-emptive.

Excerpts from CNBC-TV18's exclusive interview with Ajay Mahajan:

Your initial thoughts on it? No surprises there at all?

There are no surprises at all. All the policy rates are as per our expectations. Also, no forecast has been revised so it is all fairly positive and the RBI has proven that it is going to be slightly pre-emptive or rather chooses to be pre-emptive and ahead of the curve in terms of the tightening process. This will be generally perceived well by the markets including the bond markets. Obviously the market was somewhat divided and some people thought that there might not be a hike.

So the immediate gut reaction of the bond market would be to sell, but I would think that there would be very good support very soon coming into the bond market at levels of 8.30 or higher.

With the interest rates actually helping the domestic situation, although we are not a capital account convertible economy, but it has a positive impact on the rupee. We see the rupee probably strengthening further to 46.75 and perhaps a bit lower against the dollar.

Your thoughts on the kind of announcements. Are you getting a feeling that the next rate hike is not very much on the cards? The governor is trying to be very dovish in terms of his future outlook of rates not just intermediate but even October seems to be a bit of a question mark. Under the circumstances where do you think bond rates will stabilize for the next quarter?

Everything that the policy has talked about, broadly on the benchmark rates is entirely in line with our expectations. We did expect an increase of 25 bps, we did not see a change in bank rate and we did see a change in CRR. This is because we did not see any structural liquidity issues in this market right now. All in all the market should be pleased broadly that this time it has not really been surprised or shocked by the interest rate action.

The risk appetite, which I was talking about a little while back has diminished sharply on the wake of global uncertainties, rising commodity and crude prices, pressure on inflation. So, generally speaking those traders who could take larger positions earlier are facing a risk of diminished appetite, that's one.

Second, in this market one can either play from the long side or can be squared, one really cannot short the bond market to make money. The market generally waits for positive conditions to develop in the bond market to play from the long side.

I do believe that right now this particular interest rate action of the RBI is certainly pointing towards that. Ahead of the curve, a sort of tightening process, which means and implies that atleast for the next few weeks or maybe months unless there is a geopolitical event, the market can heave a temporary sigh of relief. There maybe more consolidation of this view depending on how the US data comes out.

When you are saying it is pre-emptive are you seeing appetite for bonds returning? Does it mean buying is there because of the feeling that atleast there is no rate hike in the next couple of months?

I do favour the view of cautious bullishness on bond markets. I do believe that at levels of 8.30-8.35 there is value in the fixed instrument even upto 10 years. Although my bullishness is a bit more in the 5-year end where we believe that there is a chance that the 5 year can go down all the way to 7.35-7.40 from the current 7.75 levels.

I do think that there is room for cautious optimism on the bond market for the next 3-4 months. This can actually convert into a cyclical change of the bond markets depending on further policy direction on US interest rates.

Does this statement give you any indication on the Governor's stance on growth. Is he saying that he is concerned about inflation so growth does not matter too much or does he say that growth matters and that is why he is telling that this is a pre-emptive rate and there is going to be no further hike?

I would not read it like that. I would probably read as highlighted in the statement that there is an even balance at this point of time between growth expectations and price pressures. Clearly he has moved ahead of the curve and one of the reasons why there was an intra policy watch hike was also because the pressures on inflation, crude were quite high. This was slightly pre-emptive if not largely pre-emptive.

On balance, I would say that this policy hike would reduce uncertainty in the market. If there wasn't a hike it would have actually increased and heightened a sense of uncertainty in the market, which is not good for any market. So I think this is pre-emptive if you cannot see a future hike now.

If FOMC does not hike in August, it will be very positive for the bond market and for the coming three months.

For the stock market can you tell us what it means in the sense of expectation of growth?

Stock markets today have become largely a function of global liquidity. I would think that if today an investor in the US is getting 5.25% risk free in US dollars, the incentive for that investor to take emerging market currency risk in the wake of serious vulnerability of some of these emerging markets, oil prices and current account deficits is frankly low.

So, I do not really see foreign institutional investor appetite coming back in a hurry. Having said this, the earnings growth from India will be reasonably good and has been highlighted even before. The credit demand has not really tapered because the ability of profit and loss accounts of reasonably smart companies and a number of them in emerging corporate areas, not just high corporate, is quite high in order to absorb 1-2% hike in interest rates.

So I would think that earnings growth will be good and on pure domestic considerations the stock market should move up from here.

The Monetary and Credit Policy 2006-2007

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