The government may have done a good job by going for a lower borrowing plan in the first half of the next fiscal. But Bhaskar Panda, Senior Vice-President, Treasury Advisory Group, HDFC Bank, and Mythili Bhusnurmath, Consulting Editor, ET Now, are a little unsure about the path forward. They spoke to ET Now.
Edited excerpts:
ET Now: What did you make of the borrowing programme calendar? Economic Affairs Secretary went out of his way to say how much the government is cutting down on borrowing in the first half of the new financial year.
Mythili Bhusnurmath: Well, certainly the government has responded and responded very proactively. And I would say imaginatively actually. Because bond yields had gone up quite phenomenally and that would certainly have made the government balance the books. Fiscal deficit would have been in jeopardy. So, the government, armed with inputs from the RBI, has responded very proactively and imaginatively to the threat of rising yields.
For the first half of the calendar, the borrowing has come down quite significantly by as much as Rs 84,000 crore and there is also a move to shift to the shorter end of the market. That again is a very welcome move. The fact that they are going to draw more from the NSSF and they have reduced their buyback is a very, very good sign and that is why we have seen yields react so positively.
For public sector banks, it is particularly good cheer because remember March 31 is when they would have to mark to market the sizable part of their portfolio and to the extent that yields come down and prices go up, the losses they were sitting on would come down substantially. All in all, I think we must say kudos to the finance ministry and the Reserve Bank of India.
ET Now: What's your sense on the calendar? Would you agree with Mythili? Or, do you see some fears in front loading in the first half perhaps because we also head into an election year?
Bhaskar Panda: See this is something which market was hoping for and I think that the government has given what the market was hoping for. I agree with Mythili that this also takes away lots of year-end pain from the balancesheet of most public sector banks.
However, I am not so sure about what is going to happen after this in the second half of the next calendar because government borrowing still remains at the same level. They just postpone the problem to probably the second half.
This has helped. A couple of things are very innovative in the way it has come out. One, the government is moving towards inflation related bonds which they have tried earlier. Second, they have brought down the 10-year maturities. The amount of borrowing will come down. Looks like, they have thought over and taken a right decision.
We have to see how it will turn out next year and how the market will take it. Today has been basically the reaction to this announcement from the borrowing calendar. Todays market will not be the actual market going forward. We have to see how market is going to react in future.
Mythili Bhusnurmath: You are entirely right on that, but we really do not know what the second half will look like and as we step into the elections and it is quite possible that the second half borrower calendar might become much higher. But for now, the government has adopted a number of measures to keep the bond market happy and in particular, I would like to ask you about the inflation linked index bonds. The fact is that in the past these did not have a very happy history. Do you think that the shift to consumer-linked inflation rather than the WPI will lead to a better future?
Bhaskar Panda: See as I said intention is right. How it will turn out, how the market participants are going to kind of take it is something which I am not sure as of now. However, intention is right and these kind of bonds that have been tried earlier have not taken off. However, this is a good step. In fact, this is something which should have happened earlier.
Mythili Bhusnurmath: But if you read between the lines, between two announcements — one on the inflation linked bonds and two of the shift to shorter maturities — does it suggest that the government is reconciled to the fact that inflation and hence interest rates will also be looking up?
Bhaskar Panda: Most of us now believe that inflation will be a little higher than projected, but that also depends on a lot more factors, including your monsoon and so on and so forth. Already, crude prices are very high and probably that will also drive up inflation figures, going forward. Inflation is a worry, which will remain. That is part one. Part two, most of the central banks globally are increasing interest rates except probably us. So, on interest rate I do not know. I cannot take a call right now that it is going to increase in say second half of 2018-19. But yes, there is a worry on inflation, it looks like.
Mythili Bhusnurmath: In RBIs forthcoming monetary policy announcement, which would be the first for the coming fiscal, what are you expectations? But even so if the RBI does not give any cheers to banks on that score, are you hoping that RBI will be a little bit more pragmatic like the government and hence allow them to kind of stagger their losses? Will it be like as Dr Viral Acharya said in the past that banks need to manage their risk and we do not expect any kind of forbearance from the central bank, can we hope for some forbearance at least on that score?
Bhaskar Panda: The RBI is doing its job. They have specific things to target and they are doing it. If somebody is expecting some sops from there, I think I completely agree with the deputy governor. One has to manage ones balancesheet. But having said that, obviously there are expectations from the RBI to be a little more compassionate. Whether they will do it or not, it is anybodys guess now. I feel the RBI might keep it status quo at the next policy meeting. We need to wait and watch how it comes out. There is still time left.
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