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Mar 04, 2013, 11.41 AM IST | Source: CNBC-TV18

Budget Analysis: Bond mrkts may face liquidity crunch in March, says Nomura

Neeraj Gambhir of Nomura India, says that the market was expecting a gross borrowing figure of Rs 5.75-6 lakh crore but the figure of Rs 6.3 lakh crore was much higher than market expectation.

Neeraj Gambhir of Nomura India, says that the market was expecting a gross borrowing figure of Rs 5.75-6 lakh crore, but the figure of Rs 6.3 lakh crore which came out was much higher than market expectation. Currently, current account deficit (CAD) is a bigger issue. There is a possibility that the bond market may face liquidity crunch in March.

It is expected that CAD number is likely to be 6 percent of GDP which will be fairly high. This number will act as an impediment towards RBI easing of rates.

Below is the edited transcript of his interview to CNBC-TV18.

Q: The figure of Rs 6.3 lakh crore is not much of extra borrowing. We have to deduct Rs 50,000 crore which will be buyback of FY15 bonds. Why is the market so worried? After all the net borrowing is Rs 4.84 lakh crore, last year it was Rs 4.7 lakh crore, if one could manage Rs 4.7 lakh crore why should one be worried about Rs 4.8 lakh crore?

A: Yes, the market consensus was around Rs 5.75-6 trillion of gross borrowing after taking into account, around Rs 40,000 crore worth of bond buyback. So Rs 6.3 trillion number even though the bond buyback amount was slightly larger than what the market expected. The market had a figure of Rs 4.5 lakh core and not Rs 4.75 lakh crore in mind.

Secondly, the overall size of the gross borrowing program itself is pretty large at 6.3 assuming everything goes by, it is a fairly large amount of auctions to be absorbed by the market. There is always a term issue in the bond buyback mechanics. They will be buying shorter-dated bonds and issuing longer-dated bonds to the market. So market has to find much extra demand for long-dated bonds. So to that extent the bond buyback also adds to the pressure in terms of supply to the market.

Q: Is the bond market factoring in more easing by the Reserve Bank of India (RBI) given the Gross domestic product (GDP) print?

A: There are no indicators as such from the GDP print. I think a kind of door is opening for some kind of RBI action in March, but not sure what kind of action. CAD is the bigger issue, data of which will be out by end of March. It is expected that CAD number is likely to be of the order of 6 percent of GDP which will be fairly high. 

So if RBI is waiting to see how the CAD behaves then they should refrain from doing anything in March. The liquidity position is likely to worsen further in March, the RBI may look for some cash reserve ratio (CRR) reduction. 

I don’t think there is yet a case for any rate reduction in the month of March unless and until RBI were to take a very sanguine view of this Budget and believe that 4.8 percent of deficit is a good forward looking guidance and they should act accordingly.

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