Opinion | RBI says 'Main Hoon Na' to bond market
Over the course of the year, the RBI will have to bite the bullet and communicate the change of stance from accommodative, as real interest rates, net of inflation, are negative
Let us start with a perspective on the role of or expectations from the RBI at the current juncture. We are moving ahead from times of unprecedented slowdown (negative 23.9% in April-June 2020 and negative 7.5% in July-Sep 2020) to high growth, albeit helped by lower base i.e. slowdown in 2020-21. With growth normalizing, money supply in the economy being on the higher side and commodity prices nudging up and pushing inflation, it is a matter of time the RBI moves from extraordinary low interest rates towards normalization. At the same time, there is a huge fiscal deficit of the Government and big-time borrowing from the market. The implication is, the borrowings through Government bonds may disrupt the bond market by pushing yield levels (interest rates) higher. The Government Securities yield curve is the reference point for pricing of the whole gamut of bonds i.e. Government, corporates, etc. and resource raising. Yields moving up immediately would not be a welcome development as that would push up interest rates at a juncture when the Government is spending so much to pump up the economy. So what does the RBI do? Do a balancing act on a tightrope, on one hand give the message that interest rates have to eventually move up, as we normalize, at the same time keep Government bond yield levels steady.