RBI may have to Keep Rates Low and Liquidity Easy

: Mint Road will have to take the lead in holding down North Block’s borrowing costs as bond traders believe the latest raft of federal incentives are more in the nature of guarantees, potentially with a limited role in driving immediate economic expansion.

Finance minister Nirmala Sitharaman on Monday expanded the government’s emergency credit line guarantee scheme (ECLGS), announced a fresh guarantee plan for the microfinance sector, and also opened a concessional loan programme for the healthcare industry.

Economists estimate that the total impact of the government measures will be 0.6% of GDP.

Bond yields climbed slightly on Tuesday with the benchmark 10-year bond climbing to 6.08% a two-month high, before ending down at 6.04%. Dealers said the benchmark yield does not reflect the economic scenario.

“Bond supply has gone up, inflation is beyond 6% and growth is better but yield have not moved. The RBI has to ensure that government borrowing costs remain low but the challenges will increase as the central bank prolongs the exit from this policy,” said Naveen Singh, senior vice president, ICICI Securities Primary Dealership.

HSBC chief India economist Pranjul Bhandari estimates that up to 43% of the new outlays are made up of credit guarantees and the cash outgo for the government this year will be Rs.1.3 lakh crore or 0.6% of GDP, out of the Rs.6.3 lakh crore packages, which is 2.7% of GDP.

Over the past year, the RBI has steadfastly kept the benchmark yield under check by buying in the secondary market. Dealers’ estimate that an unprecedented 70% of the central bank, potentially skewing secondary-market yields.

“Never ever has the central bank sat on such a high amount of government securities,’ said Sandeep Bagla, CEO, Trust Mutual Fund. “Typically the benchmark bond should be at least 200 to 250 basis points above inflation. Even if we take core inflation at 4.50% the yield should be at 7% or more.”

Consumer price inflation rose to a six month high of 6.3% in May due to a rise in food and fuel prices, latest data showed. Inflation has jumped more than 200 basis points from the 4.23% reported for April and is now beyond RBI’s outer band of 6%, making the central bank’s job tougher.

“The government has got a large dividend from the RBI. It is sitting on a cash surplus and is also earning a steady income through taxes on fuel, which have not been reduced” said Singh. “Last year, then math was clear because the RBI had to support growth at all cost, and weak demand meant inflation was not a threat. But this year, inflation is rising, demand is not that weak and growth is better. The RBI cannot continue with this easy policy forever. How and when it will tighten is a big question.”

Last month, the RBI approved a Rs. 99,122 crore dividend for the nine months ended March 2021, 73% higher than the entire previous year’s dividend. The Centre collected a record Rs.3.9 lakh crore from fuel duties last fiscal, up 77% on year, and has not cut duties this year.S-ET

Similar Posts

Leave a Reply

Your email address will not be published. Required fields are marked *