Mumbai: Rajeev Malik, head of India and Asean Economics at Macquarie Capital Securities Ltd, comments in an interview on the borrowing calendar of the Reserve Bank of India (RBI). The central bank plans to raise 63% of its Rs4.57 trillion borrowing programme to bridge the fiscal deficit in the first half of 2010-11. Edited excerpts:
What are your thoughts on RBI’s borrowing plan?
The surprising part was the front loading, which was perhaps less than what I would have anticipated.
It essentially means that the central bank as a debt manager is still concerned about the size of borrowing and would prefer to push out in the second half some of the higher borrowings. So it’s actually trying to push out the broader pain in terms of supply rather than take it upfront all together. Duration-wise, it was generally expected that they would have it at the shorter end, which pretty much came through. Bond markets have been somewhat in a bizarre mood.
Looking ahead: Macquarie Capital Securities’ Rajeev Malik.
Prior to the surprise rate hike, 10-year bonds had almost rallied 20 basis points (one basis point is one hundredth of a percentage point). The unexpected rate hike happened and bonds were sold off. Thereafter there was a bit of reassurance in terms of the borrowing calendar itself.
With the way the 3G auction is going ahead, most likely the government will land up collecting more than what had been budgeted in the Budget. So there are some positive trends taking place. At the same time, the overall size still remains somewhat daunting.
Can you comfortably bank the bond yield though within a particular range for the rest of this calendar year?
I would still think we are going to go back up at least to 8.25%. Once the government starts the issuance, markets once again will begin to focus on the outright supply that’s actually coming through. April gets a bit of a respite because the outstanding borrowing is lower in April and then tends to pick up in the subsequent months. RBI has just started in terms of its monetary normalizations or more of that has to come through as well. From wherever we are at 7.80% now, we will see 8.25%, but over the course of the year, it will begin to flatten out simply because the short rate is going to move more than the long rates.
What is your take on the big rise in many commodities, particularly crude oil?
This is the year when the government, if it wants to do anything on the subsidies front, it potentially has the broader political backdrop to do that. There are no compelling state elections; the setting is there, most of the relevant advisers want, at least on the fuel price, some element of pass through to come through. So it’s all up to the oil minister to propose a palatable mechanics. Ultimately the political bigwigs have to take a call and it’s going to be an outright important call just to sustain the broader uptrend as far as growth is concerned.
How do you think the central bank would approach the strengthening rupee? Do you think it will sit back and only intervene to temper out the pace of acceleration or be content to let the rupee appreciate and cool inflation?
RBI’s stated objective has never been to use the rupee to check inflation. Rupee appreciation automatically means that prices on the landed imports becomes better, so be it. Ultimately what you are seeing is really more in terms of global platform, especially with expectations about a potential yuan move coming through. RBI is not going to draw a line in the sand at the current levels. It is going to be more to temper the move. Also don’t forget that every time it intervenes aggressively, as it has somewhat in the last few days after being away from the market a long time, it is essentially injecting rupee liquidity at a time when it is trying to scale down the excess in the system.
So there are limits in terms of how aggressively it can do that. It is not as if flows or capital flows are becoming problematic. We are nowhere close to the pressure points we experienced earlier.
We have started our process of tightening but all eyes are on the US Fed, which is still singing a dovish tone. What is your best assessment of when it happens because now we are hearing lot of analysts say that maybe the Fed remains on hold for longer than we thought?
I think that is very true but in a way that complicates matters for emerging markets, especially high-profile ones such as India. India has a unique challenge quite apart from what is happening cyclically globally. India’s own integration with rest of the world is somewhat lopsided. There is all that talk about financial sector reforms, and while they are important, the government doesn’t seem to be able to do a whole lot.
The Fed being dovish a whole longer actually makes emerging market space more attractive, and with that India tends to stand out. Also, it is interesting that higher oil prices indicate the broader liquidity setting globally because it is striking that Asia is the net oil importer. All Asian currencies and asset prices seem to be positively correlated with oil prices.