The Indian bond market requires almost ₹3-4 trillion intervention from the Reserve Bank of India (RBI) to be able to manage the government’s borrowing program, according to Neeraj Gambhir, director of treasury at Axis Bank.
In an interview with mint, Gambhir said the RBI will need to ensure that there is excess liquidity and that monetary policy is accommodative, given that fiscal year 2022 is likely to be an uncertain year.
“I think we will need a place close to ₹3-4 trillion RBI intervention to be able to manage the borrowing program without creating substantial pressure on returns. This represents 20 to 25% of the borrowing program. Of course, that can change depending on how the year progresses and the outlook for inflation and interest rates. We know that in addition to G-SAP (government securities acquisition program), RBI would also continue to do open market operations and Operation Twists. The RBI would decide which instrument it wishes to prefer over the others based on its own assessment, ”he said.
In the latest policy, the RBI announced a G-SAP, in which the central bank would buy government bonds worth ₹1 trillion from the secondary market in the first quarter of this fiscal year. The first purchase of ₹25000 crore took place on April 15th and the following ₹35,000 crore is slated for May 20.
While G-SAP helped contain returns, Gambhir stressed that the economic recovery could be affected in the current fiscal year.
“We are still at the start of the year and we are also in the middle of a second wave. Most economists have started to downgrade forecasts for this quarter and the full year. Most lean towards 9-10% for FY21. We need to see if that forecast deteriorates further as we see progress around lockdowns. Depending on the extent of the lockdowns, there could be further downgrades, ”he said.
Gambhir also said he does not expect significant fundraising through corporate bonds this year as most companies are sitting on excess cash. Over the past year, many corporate and non-bank finance companies have benefited from RBI’s Targeted Long-Term Repo Operations (TLTRO) which provided liquidity support to different sectors. This window allowed banks to borrow one to three years of funds from RBI at the repo rate by providing government securities as collateral.
“We will see a lot more normalcy in corporate fundraising in the bond market. We did not see any increase in spreads or absolute increase in yields in the bond market this time around. But we haven’t seen any issuance activity on the market despite attractive yields. I would see less shows this year because last year a lot of the increase came from TLTRO money, ”he said.
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