The Indian bond market requires close to ₹3-4 trillion of intervention by the Reserve Bank of India (RBI) to be able to manage the government borrowing programme, according to Neeraj Gambhir, treasury head at Axis Bank.
In an interview with Mint, Gambhir said RBI will have to ensure that liquidity is in surplus and monetary policy is accommodative, given that fiscal year 2022 is likely to be an uncertain year.
“I think we will require somewhere close to ₹3-4 trillion of intervention by RBI to be able to manage the borrowing programme without creating substantial pressure on the yields. That is 20-25% of the borrowing programme. Of course, this can change depending on how the year progresses and what the outlook on inflation and interest rates are. We know that besides G-SAP (government securities acquisition programme), RBI would also continue to do open market operations and Operation Twists. RBI would decide which instrument it wants to prefer over the others based on its own assessment,” he said.
In the last policy, RBI had announced a G-SAP, wherein the central bank will purchase government bonds worth ₹1 trillion from the secondary market in the first quarter of this fiscal. The first purchase of ₹25,000 crore took place on 15 April and the next ₹35,000 crore is scheduled for 20 May.
While G-SAP has helped bring the yields under control, Gambhir pointed out that economic recovery could be hit in the current fiscal.
“We are still in the early stage of the financial year and we are also in midst of a second wave. Most of the economists have started downgrading forecasts for this quarter and the full year. Most are leaning towards 9-10% for FY21. We need to see whether these forecasts further get downgraded as we see progress around lockdowns. Depending upon how extensive lockdowns become, there could be further downgrades,” he said.
Gambhir also said he does not expect large fundraising through corporate bonds this year as most corporates are sitting on surplus cash. Last year, many of the corporates and non-banking finance companies benefited from RBI’s targeted long-term repo operations (TLTRO) that provided liquidity support to different sectors. This window allowed banks to borrow one-three years of funds from RBI at the repo rate by providing government securities as collateral.
“We will see far more normalcy in corporate fundraising from the bond market. We have not seen any increase in spreads or absolute increase in yields in the bond market this time. But we have not seen issuance activity in the market despite attractive yields. I would see lesser amount of issuance this year because last year much of the uplift was from TLTRO money,” he said.
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