Market waiting for RBI to walk the talk on its verbal support: Jayesh Mehta


It seems RBI is turning pretty hawkish when it comes to interest rates. They see inflation rising and some of it is very evident in what is being said. It has come out in the minutes of the MPC meeting indicating that there may not be interest rate cuts anytime soon because there is a fear of inflation getting stroked further. If that is going to be the case, it also seems to suggest that the cost of borrowing is going to go up which means that for economic recovery, businesses need the money now. If that is not going to happen, then economic recovery could be far away. If you can help us understand the fallout of this scenario and where are we seeing bond yields rise this much.


We have to look at the last two weeks for what has happened or maybe we should go back a little bit further to the beginning of the year. Yes, we had extra borrowing. The RBI governor did make a statement that the central bank will do whatever it needs to do to support the economy and from that perspective the market had full trust and continued to buy bonds thinking that RBI is always be there to support as and when it is required. Of course, with the overnight rate being at around 3.25 or so and the 10-year rate at 5.70-5.75, it is very much justified. In fact, it should be much lower.

In the last two weeks, a couple of things happened. One, a little bit of push back happened on the US bond side in the first week of August, then we had the policy meet where some people were expecting rate cuts. People had read it very differently that inflation was worrying the MPC on the 6th, whereas the governor was categorical that people should keep the powder dry, save the ammunition for the right timing. But post that we had CPI numbers coming surprisingly elevated than market expectations and then you had the US Fed meeting minutes, which did not give comfort that liquidity will continue for a longer period. And then we had our minutes, which a lot of people had interpreted differently. While all this was happening, the yields were drifting higher slowly. Last Friday, the bonds actually got devolved for the first time this year, and naturally when all these events happen, you need a solid hand from RBI and some action. But after the minutes, I think the governor did give an interview which was very nice, where he actually addressed this upfront. Having said that, we managed Rs 5.5 lakh crore purely on verbal support. The market now needs actual support, some action from the RBI side and till that action comes in, the market will keep on testing higher yields. So the time has come where verbal support has to be followed by action.


You are saying that the markets are expecting some sort of support from RBI, but RBI did go ahead with rate cuts and has

also
given some sort of a relief to the banking system and the government is also doing its part. Also at a time when the government knows that due to this COVID situation their entire fiscal math has really gone for a toss, their revenues are not flowing in and the disinvestment target also looks very difficult, so what kind of support is the market really anticipating during these times?

So if you really look at the maths, the supply, the state and the central governments have put together would be around Rs 22 lakh crore. With that kind of supply if you look at the investor demand and appetite, the market does expect that during the whole year RBI would definitely buy some amount of bonds, maybe around Rs 2-3 lakh crores of bonds. Now, of course, it is completely dependent on when RBI buys it. But there are, of course, different ways to look at it. Market took your verbal commitment very well. We did a fantastic Rs 5.5 crore of borrowing. Now the verbal thing needs to be followed up with action. When the bond issuance happens, there is a duration at which it comes to the market. There is also a risk which comes into the market, and some of this risk has to be taken off. So if we see RBI come up with OMO or Operation Twist sometime early next week, whereby it sucks out some duration from the market, the market will get some comfort. The market will get confidence that okay as and when required RBI will always be there for support. People will try to push the yield higher till the time actual action support comes in. They will try to drag it a little bit higher and higher with every option available.





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