Market was keenly looking forward to the Reserve Bank of India MPC meeting results scheduled for June 3-5, when on a cryptic message from Reserve Bank of India on early May 22 that Governor Shakikanta Das would make a statement to the press at 10 am kept the anticipation high, till the announcements actually came.
Market was already expecting a 40 to 50 basis points cut in repo rate for the June first week and Das announced that the MPC, in fact had been in session and with a 5-1 vote decided to lower the repo rate to 4 percent, down 40 basis points. And, as a consequence, the reverse repo under the LAF was brought down to 3.35 percent and MSF and Bank Rate to 4.25 percent.
Post the address to the nation by Prime Minister Narendra Modi where he announced a Rs 20-lakh-crore stimulus package, Finance Minister Nirmala Sitharaman shared key details of the Atmanirbhar Bharat programme.
Since then, some announcement was expected from RBI in light of continued lockdown and the response from the regulator to some of the pointers from the details announced by the FM.
Economy is grappling with COVID-19-induced challenges. The stimulus package comes up with clear direction on the way forward. The market when finally looked at the numbers announced in the stimulus package realised that the government has quite judiciously used various options available to it.
A good quantum of relief is in the form of guarantee and liquidity support. The overall impact of the Atmanirbhar Bharat Package seems to be in the range of 1 to 1.5 percent of GDP as per market assessment. Further, state governments were allowed to borrow additional 2 percent of GDP, ie from 3 percent to 5 percent with certain conditions.
Additional borrowing of 0.5 percent of GDP under automatic approval, additional borrowing of 1 percent of GDP subject to introduction of structural reforms and last borrowing of 0.5 percent of GDP on achievement of milestones. Currently eight states fulfil these conditions.
The Reserve Bank of India had previously issued revised GoI borrowing calendar, where the first half of FY21 borrowing was increased from Rs 4.88 lakh crore to Rs 6.90 lakh crore and for the full FY21, borrowing was revised upwards to Rs 12 lakh crore, ie 1.5 times of the budgeted number. These additional borrowings were on expected lines.
Thus, the additional borrowing announcements and the likely impact on fiscal numbers due to the stimulus package announced seems to have been taken into stride by the market.
After MPC meeting results, the 10 Year G-Sec, which was trading in a range between 6 to 6.15 percent moved swiftly to 5.89 percent before settling in around 5.96 percent, with new 10 year G-Sec 5.79 GOI 2030 trading between 5.70 to 5.80 percent. The G-Sec yields are likely to trade in a range with softening bias. Despite the increased borrowing numbers, market seems well supported.
Along with these moves, we have to be mindful of the market steps taken by the Reserve Bank of India.
The central bank has regularly come up in the market with open market operations (OMOs) and operation twists. The bid acceptances indicate that RBI would prefer the market to move with a softer bias.
The market has a surplus liquidity to the tune of Rs 8 lakh crore, which is being daily deployed in the reverse repo with RBI. This liquidity and other RBI market interventions through OMOs and further operation twists will likely ensure that government borrowing targets are met without unduly pressurising the yields.
We cannot also be insulated to what is happening elsewhere in the world. Major central banks across the globe have shown their determination of keeping surplus liquidity and interest rates at record lows to ensure that the respective economies get the uplift they require. A similar commitment from RBI is reflected in various measures announced by it on May 22.
It is likely that the reform measures will lead to more robust inflows in the country from overseas in bonds and equity along with FDI to take part in Indian government’s resolve to be part of the global supply chain while becoming self-reliant.
Special series bonds for overseas investors and various other measures to open up of foreign exchange and derivatives market will allow overseas investors to suitably invest and to hedge their investments.
With all the measures in place, it is likely the new 10-year benchmark government paper may follow a trajectory towards 5.50 percent or lower. The short-end of the curve is likely to remain soft and will see a sharper downward move as MPC has come up with a 40 bps rate cut.
Thus, to conclude government borrowings in present circumstances remain liquidity neutral for the banking system.
The money borrowed under present fiscal conditions comes back to the banking system in the form of government expenditures. In the current environment of surplus liquidity the G-Sec yield are likely to remain well supported with further directions from RBI actions like future rate cuts, OMOs/ special OMOs and operation twists.
The author is Executive Director & Head Treasury at IDBI Bank.
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Check our complete coverage on RBI’s May 22 announcements here
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