What do you make of the policy statement? Is this something that the market wanted to hear?
Undoubtedly this is what the market wanted to hear. To start, in a lighter vein, the RBI governor talked about faith and faith moves mountains. The market will keep faith in RBI’s ability to manage the current situation. Undoubtedly this is the policy where they have started the normalization process, liquidity will be adequate but not in excess. The monetary policy will be less accommodative and hopefully with SDF, even though the reverse repo and repo rate corridor is maintained. It will probably result in the operating rate moving towards repo rate. So it is a policy which will give confidence to the market to keep faith in RBI.
SBI’s Ashwini Kumar Tewari says it is very evident that the RBI is guided by its own views and does not get influenced by the market. Does it mean that you guys are not doing your job?
I know you have been targeting us but on a serious note, the market is actually pricing in a lot more actions by RBI and probably that is the reason why RBI would like to discount the market right now. If we see the spread between 10-year minus overnight or 10-year minus one year, it is almost a 1% to 1.25% hike in repo rate. Now whether that happens or not, depends upon data. So RBI is now probably trying to anchor the market rather than the market leading the RBI.
We are going to see the Fed meet in May and what we are hearing from the Fed governors is that the Fed is likely to hike rates by 50 bps and also start the winding up of their balance sheet much faster than earlier. Does that change things as far as RBI’s today’s estimates are concerned on the macro economic scenario, in terms of inflation, in terms of growth, in terms of rate estimates?
Undoubtedly. I am sure RBI’s today’s decision would have taken into account potential Fed action. The Fed rate getting raised by half a percent and going to a neutral rate of anywhere between 2.5% and 2.75% was well discounted in the US as well as global market. The surprise element from the Fed minutes was $95 billion withdrawal on a monthly basis. That is almost a trillion dollars of liquidity withdrawal and that kind of liquidity withdrawal is likely to have an impact on asset prices. It is likely to have an impact on global growth. I am sure RBI will keep a watch on the actions of the US Fed to take that into consideration for their decision making.
What do you think the impact of this HTM relaxation would be? Will banks be willing to take on more government bonds as a result?
This will be just one small catalyst, not necessarily the only catalyst for banks to invest into government securities. In some sense, this is the conundrum where we have between 8 to 10 lakh crore of liquidity in the banking system and yet the 10-year government securities are touching 7%. The market is happy, primarily driven by banks to park money overnight but not willing to buy 10-year paper at 7%.
One of the reasons why banks are less enthusiastic to buy government securities is mark to market volatility which has bearing on their capital adequacy. HTM relaxation will help banks to absorb mark to market volatility and may open up the risk appetite. As I mentioned, this is one of the catalysts and not the only catalyst.
Market will now be looking forward to the passage of the borrowing program and RBI’s participation in the same. The net borrowing program at Rs 11 lakh crore plus is a humongous size. It is reasonably up compared to last year. The market was hopeful that since the government had underestimated revenue, there is a potential that the first half borrowing program could be a little lesser but RBI has given the first half borrowing program at about 59% of total borrowing program. That will require multiple catalysts for banks to become enthusiastic about buying government securities. HTM relaxation is one small step but more steps will be required.