Mumbai: The increase in bond yields, which have reached about 7.5%, reflects concerns among traders about the government’s fiscal deficit, according to ICICI Bank Ltd chairman K.V. Kamath. The government has budgeted to borrow Rs4.51 trillion in the year to next March, equivalent to 6.8% of gross domestic product.
Different views: K.V. Kamath and K.C. Chakrabarty. Ramesh Pathania / Mint
Kamath added in an interview that the government should articulate the measures it would take to bridge its fiscal gap to ease market concerns.
But Reserve Bank of India deputy governor K.C. Chakrabarty says: “Banks are not repricing their assets and liabilities appropriately as per the market realities and that’s why they are moving in different directions.” Edited excerpts:
One area of concern for many CEOs is the fact that bond yields have gone up to around 7.5%, which makes them a little uncertain about where interest rates could be headed. What is your analysis of why bond yields have spiked?
Kamath:I believe that bond yields have spiked up because there is still uncertainty among bond traders as to how the government would meet the large deficit. It (the reason) cannot be current demand and supply. Currently, I would say availability of liquidity is good, so that does not warrant the sort of yields which we are seeing. It is clearly in anticipation of something that they see could happen. I think what is required is probably articulation by the government as to how they could bridge this gap. For example, the government has large market value in terms of their own listed companies and indeed there are companies which are not listed. If the government were to say a part of this were to be released, without getting into numbers such as (Rs)1,000 crore or (Rs)2,000 crore, but say the market cap of listed government companies is Rs15 lakh crore and if you say X% of this could be put into the market—could be, I am not saying will be—I think that will give immediate comfort to the market and get interest rates down to correct levels.
But it is these sort of actions probably which would need to be done rather than anything basic. Government is wealthy, but it has to articulate that the wealth will be well used if need be and that should provide comfort to the market place.
What’s your response as a central banker to the fact that yields have spiked up?
Chakrabarty:We feel...there is still scope for interest rates to soften... This is what governor (D. Subbarao) is indicating again and again...if they (banks) can bring down the interest rate on deposits a little bit lower and, accordingly, also reduce the lending rate, the pressure will automatically come down.
Banks are not repricing their assets and liabilities appropriately as per the market realities and that’s why they are moving in different directions. We are not too worried about the bond yield trading at 7.5%. As a market, if banks are paying for one-year deposits 7.5-7.75%, I don’t think the 10-year bond yields are too high. But then, if the market place behaves in a particular way and if they can bring down the cost of deposits, I think the bond yields will automatically soften. So we feel that we are quite comfortable with the overall thing and we are trying to give the same signal again and again. We are saying the same thing—that there is a possibility of interest rates remaining benign for a stable period of time.