If we look at the RBI commentary there was quite a bit of stress on the growth of the Indian economy. The RBI Governor was talking about how manufacturing is doing quite well, farm sector remains quite robust and he also talked about rural demand recovering. Does it seem like that everything is now pointing to the fact that rural demand is coming back?
Undoubtedly growth continues to soften. RBI itself has revised growth target downwards from 7% to 6.8% for FY23 but these are unusual circumstances. Globally there is a massive storm going on and within that India has so far done well. This policy outcome was as per expectation as 35 bps rate hike was discounted by the market and hence there is little movement in yields. So net-net the policy was as per market expectation and the data going forward will determine what happens to the terminal repo rate and what happens to the liquidity.
Mythili Bhusnurmath: We are seeing strong services pick up and revival of demand both in the rural sector and the services sector. This would add to inflationary pressures but RBI has kept inflation estimate unchanged at 6.7% for the year. Where do you think bond yields will end because government still has to borrow a substantial amount according to its borrowing calendar for the year?
Absolutely, but in the bond market today there are conundrums we believe in. The state governments this year potentially could borrow between 150000 lakh crore to 200000 lakh crore less than the budgeted. They have surplus cash, they do not know how to spend money and they may end up cutting their borrowing programme. If that happens the beneficiary will be the bond yields. The second conundrum with respect to liquidity is the small savings collection.
For some reasons the small savings collections balloons in Jan, Feb and March period. I believe last March these small savings collection was almost 2 lakh crore plus. Now if the same trend continues then liquidity can get curtailed and that will have negative impact on yield.
More importantly market will be looking forward to 1st February to know the size of borrowing programme next year. This year RBI and the market has been able to absorb enhanced borrowing programme of the government securities but we began the year with almost 10 lakh crore of liquidity. Hopefully in April we will probably begin with 1 lakh or 1.5 lakh crore. Will we have ability to borrow large size borrowing programme, answer is again debateable. So my feeling is that yields are going to go up and down based on global factors like where do US Fed end terminal Fed rate, second, where RBI ends their terminal repo rate and third the size of the government borrowing programme in next fiscal. Yields will probably fluctuate between 7.25 on the lower side and may be 7.75-8 on the higher side.
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