According to Tirthankar Patnaik of Religare Capital Markets, the size of the government’s borrowing program will weigh down heavily on the market.
Patnaik believes the government has underprovided for subsidies in FY13 mainly because it has assumed aggressive fuel price hikes. “We think the subsidy number might be closer to about Rs 75,000-90,000 crore depending on at what level crude remains and what happens to the currency,” he said.
He goes on to say that liquidity is likely to remain tight during the year, due to which the RBI will need to conduct more open market operations even after a repo rate cut. “We expect the RBI to cut rates in April, and see a total cut of 100 basis points this year,” he said.
Below is an edited transcript of his interview with Udayan Mukherjee. Also watch the accompanying video.
Q: It’s been very sluggish last couple of days after the Budget. The market seems quite unimpressed and even bond yields are refusing to come down. Do you think the market is factoring in some slippage in the deficit and not that 5.1% number which the government has indicated?
A: Clearly the 5.1% number that the government has come up with does leave a high room for upside. We believe that the overall number finally could come in at about 5.8%, so not anywhere near the 5.1% that they are saying.
I think this slippage going to come from the subsidy numbers that the government has put in, because it clearly leaves room for upside there. Rs 43,000 crore is not what might pan out; it might be closer to about Rs 75,000-90,000 crore depending on at what level crude remains and what happens to the currency.
Also the government’s revenue estimates from telecom are quite on the high side. We don’t believe they will generate Rs 58,000 crore, we believe the number would be closer to about Rs 38,000 crore odd. Also, looking at their revenue assumptions on corporate tax, customs duties, we believe that this number is clearly going to be higher and that’s essentially what’s weighing in on the market as it looks at considerably higher borrowings this year.
Q: Where do you think the final borrowing number will be because the bond yields are refusing to come down and I think the street is working with much higher estimates than what the government put out? Do you think it might be a tight situation like it was last year from a bond yield and from a liquidity perspective again?
A: Last year the government initially started at little north of Rs 300,000 crore, but they ended up at more than Rs 500,000 crore. We have just seen the third supplementary grant essentially tabled in Parliament, so clearly last year was a stress situation in terms of borrowing. The government was borrowing not only on dated securities but also on the ways and means advances where it was essentially paying 10.5% rate.
This year, on top of that borrowing, the government is likely to borrow nearly Rs 30,000-40,000 crore extra. So while the net borrowing number at Rs 470,000 crore doesn’t look very high, we also have about Rs 90,000 crore odd of redemptions coming in which will put the overall number at Rs 570,000 crore, and this is when the government is saying that it will have a fiscal deficit number of 5.1%.
So clearly there is upside for this borrowing target and that has essentially also panned out on yields. I think yields near-term might remain where they are around 8.4% level. As and when the RBI comes out with the borrowing calendar, which will happen at around about April 15th or 17th when the policy comes in, that’s when the market will take a fresh look at what happens with pressure in terms of is it frontloaded towards the first half of the year or will it essentially happen towards the second half of the year.
Q: Should the market be hoping for oil price increases in the kind of political backdrop that we are hearing right now or do you think barring petrol nothing meaningful will be achieved?
A: The numbers that the government has put in do subsume that there will be a hike in diesel prices, that’s for sure. Having said that, given the Congress’s performance over the last couple of weeks, the market is sort of right in expecting that petrol hike is the max that they can hope for.
Our own calculations are that we will see atleast a Rs 2 hike in diesel coming this fiscal year and about Rs 4-6 on petrol.
Q: Do you think there is more of a correction waiting in the banking space?
A: Liquidity is likely to remain tight now. We had highlighted even after the 75 bps cut in CRR that liquidity positions are unlikely to ease. So the central bank in our opinion maybe will not go through another CRR cut in the near-term but open market operations have to happen this year. One has to look for about Rs 7-7.5 lakh crore of overall deposits coming in and we are already looking at Rs 570,000 crore of government borrowing program this year. So clearly liquidity is likely to remain tight.
Having said that, on rates the market was expecting about 125 bps repo rate cut during this fiscal. After the Budget numbers clearly there has been a lot of equalization coming there. Our numbers have been around 100 bps, we shall maintain that. I think with the current scene we might be looking at a 100 bps on the max that we can see on the repo this year.
So I think until the borrowing calendar really clears up, there is not too much to play here. We do have a positive stance on rate sensitives for this year because we believe that the RBI’s focus will have to go for growth at some point and this is the time to focus on growth. Two to three quarters from now inflation is sure to pick up and that’s when it will be very difficult cutting rates. At this point one has to take stock of the situation that after an 8.5% growth last year we are looking at just 6.5% in FY12. Though government numbers are quite optimistic in FY13, we believe that it will be just be around 7% and quite a lot of the street is actually below that. So if the RBI has to cut rates it would have to be towards the first half of the year and which is why we believe that we will start with a repo cut in April.
Q: For the near-term, next few weeks maybe even in next couple of months, are we consigned to a trading range?
A: I think after the Budget numbers like I said clearly there has been a lot of disappointment in terms of expectations of a rate cut and that too on the inflation numbers marginally pegged up from 6.5-6.95%. Going by what we are seeing any rate cut in April should be a marginal positive for the sector and going forward we believe that the RBI will cut in the first half. So that could be a positive surprise barring that with oil remaining where it is we might see just limited downside at this point. I would put it that way. We might just see limited downside from here.
Q: Even if we drift down from here, do you think somewhere between this 5,000-5,200 zone the market will find support again and hold onto that?
A: One has to see it in terms of what news has been already known to the market, which is that we are in a slow growth mode, that we were expecting a big number in fisc, that we are seeing inflation coming down. All these things are known and the market is essentially looking for clarity as to what happens in terms of the exact borrowing calendar of the RBI.
At this point, like we had said after the Budget also, nothing hoped, nothing gained. It was essentially meeting zero expectations. So to that extent, I think downside in the market is capped and that would essentially now depend on what happens with global cues. Numbers from FIIs have been touching USD 9 billion at this point and this has been through all these negatives. Even after the Congress’s negative performance at the elections we still have had money coming in. So I think for the foreign investor at this point India’s performance going forward, India’s growth going forward, what happens with inflation trajectory is more important that near-term concerns on what have you elections, Budget and so forth.
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