RBI policy is positive for economy in medium term: Neeraj Gambhir, Nomura Capital India
'This RBI policy brings back the inflation fighting credentials of the central bank, which will prove positive for the economy'
ET Now: Tell us about the impact you think the policy move had. Do you agree that in the medium term, it is a positive and it will correct the imbalances in the economy?
Neeraj Gambhir: Yes, in the medium term, it is a good policy and a good move to focus back on inflation. A lot of the policy space was getting hogged by the currency movements and the short term reaction to the same. The policy has brought back the focus to growth-inflation dynamics. Given the fact that inflation has been running higher than what policymakers have anticipated, there is expectation that it will continue to be a bit higher than what has been forecasted earlier the year. This RBI policy brings back the inflation fighting credentials of the central bank, which will prove positive for the economy.
Mythili Bhusnurmath: Are you expecting an increase in the borrowing numbers for the second half of the year and will they increase the target?
Neeraj Gambhir: There is a fiscal deficit number that has been already planned and there is a very strong commitment given by the finance minister on this red line, which he would not like to cross. We have already seen a few austerity measures being announced to make sure that the government spending stays within the budget.
Therefore, an increase in the overall government borrowing programme per se is not expected. Therefore, whatever is the residual that needs to be accumulated would be announced. There could be some tweaking in the borrowing programme with regard to the maturity spectrum. There could be some shift towards the shorter-dated maturities to accommodate for the fact that banks will be looking for assets to deploy the FCNRB borrowings they raise, but beyond that, I am not anticipating a substantial change in the borrowing programme per se.
Mythili Bhusnurmath: Do you expect a substantial hike in the weighted average cost of these borrowings?
Neeraj Gambhir: The fact that the interest rates in the economy have gone up as a result of the monetary policy actions taken in July and also that there has been a subsequent repo rate increase, with chances of a further repo rate increase as we go through the rest of the year, means that the interest rates in the economy across the board have gone up. The borrowing cost has gone up for the government as well as the private sector borrowers, which should start reflecting in the government’s fiscal numbers going forward.
I do not think the government bonds have actually taken most of the brunt, especially at the front end of the curve or even the treasury bill yields have gone up in the past. Therefore, all of this would start reflecting in the government’s overall borrowing cost.
Mythili Bhusnurmath: The governor spoke about the Reserve Bank of India toying with two retail CPI linked bonds. What kind of bond could they be and would that not increase the cost of borrowing into the government?
Neeraj Gambhir: The overall size of the borrowings, which is currently linked to WPI or CPI, is not very large. It is still a very small component of the overall government borrowing programme. We have some idea of the spreads that the market is asking for, with respect to the WPI as index. We have not seen any borrowing programme happen so far, which is linked to CPI, so the details are sketchy at this point of time. Even if we talked about say 200 bps to 300 bps spread to the CPI index per se, then the borrowing cost will indeed be quite high compared to the inflation index bonds.
Now you could consider this as a cost that the government is willing to pay to wean away the economy from real assets such as gold, which has had a quite a devastating impact on the current account deficit. So, yes, the cost can be substantially higher than where the current borrowings are, but that could be considered as subsidy or a cost being given to make sure that there is an attempt towards more investments going into the financial instruments as against the real assets.
Neeraj Gambhir: As I said, the details are little sketchy at this point in time, including the modus operandi. However, it could potentially be something along the lines of the small savings instruments, which are more open for retail investors. It is on tap, available through the banks and the market intermediaries and not necessarily follow a wholesale issuance process, which is currently done for the government bond market.
So I think that it makes more sense to do it in the form of a pure retail instrument, which is distributed through the banking system, like an addition to the already existing small saving instruments that we have rather than a pure competition to the wholesale borrowing programme.
ET Now: What happens to foreign fund flows into the Indian debt markets?
Neeraj Gambhir: The fund flow has certainly picked up and it has stabilised a lot. The entire sentiment regarding rupee has turned around, in line with other emerging market currencies. Now going forward, the fund flow towards emerging market economies, especially the debt flows, will be quite dependent on how the entire US policy plays out.
I do feel that current government bond yields and corporate bond yields in India are quite attractive. However, that attractiveness is marred by the fact that there is a pressure on the currency. If the currency does stabilise, then given the levels where the yields are currently, I would expect the fund flow to pick up substantially.
Also, there has been some talk about India being included in some of the major local market indices and if that were to happen, it would be a big game changer for the fund flows into the emerging market economies like India. I do feel that while there is a lot of gap between what is required for a country to be included in these indices and currently where we are, if the government were to take the right proactive steps and the bonds were to be included in the indices, there would be a substantial positive flow over a period of time.
Mythili Bhusnurmath: A person investing in the equity market is basically taking a view of the Indian economy’s future potential whereas a person who is investing the debt market is looking at the differential in yields. Would you agree that makes a debt flow person more short term than rather than the equity guy?
Neeraj Gambhir: While it is a matter of perspective and I do feel that you have all kinds of investors in both the space - both the fixed income as well as on the equity side.
The point is that as Indian economy grows and integrates with rest of the world on account of trade and on account of external borrowings further opening up of debt markets is only going to happen. It is important that it happens so that we have a better capital flow which comes into the economy.
Bear in mind that India does not need only the equity flows, but it also requires a significant amount of debt capital to come in to ensure that the real sector is financed with the right debt equity ratios.