Fiscal slippage worries will come to the fore if the GST revenue collections do not hit the Rs 1 lakh crore mark by FY19, said Badrinivas NC of Citi India.
The government on Tuesday announced a surprise bonanza for the money markets by releasing its borrowing plan for FY19, which is considerably less than what they borrowed in FY18.
This led to a sharp rally in the bond prices.
Badrinivas NC, Citi India said reduction in borrowing is positive but deferment of that to the second half is not a good sign, so it does not change the overall demand supply.
The most important rejig of the whole borrowing rejig is in 10-year rejig by reducing the supply in the 10 to 14 year and introducing 1 to 4 year and saying 10 percent of issuance will be inflation linked and FRBs. Therefore, the clear message they are sending is, “We are very sensitive to demand of the market, we are very sensitive to the fact that they do not want to be borrowing at high levels and if there is not too much appetite in the market then we are happy to relook at it from an issuance point of view.” This is very positive, said Badrinivas.
Badrinivas said right now the supply risk factor is reduced and to that extent the 10-year G-sec could be around 7.20-7.25 percent, which is a reasonable range assuming we still have to resolve the growth inflation dynamics.
However, he clarified that the question whether people in mode of reducing the duration of their bond portfolio or will people have risk-appetite to add on to the duration, this question is not going to be answered by just rejiging the borrowing programmer but it is more a function of how the growth-inflation dynamics resolve over the course of coming weeks.
According to him, from growth-inflation point of view some of the risks that continue to be are higher oil prices, what happens on MSP, and also whether state fiscals have had reasonable expansion in the last few months.
Therefore, for people to add on to the duration there needs to more evidence that inflation is going to be contained and there may not be any rate hikes.
The government yesterday also said it plans to stick to the 3.3 percent fiscal deficit target for FY19.
Badrinivas said fiscal slippage worries will come to the fore if the GST revenue collections do not hit the Rs 1 lakh crore mark by FY19.
As of march the GST revenue collection is in mark of Rs 86,000-87,000 crore.
Below is the verbatim transcript of the interview.
Reema: The 10-year yield is already around 7.35-7.4 percent mark are the gains already in the price or can there be more from here on?
A: We look at this in couple of aspects. One is the fact that what are the key measures? So, one is the fact that they have reduced the borrowing which itself is a positive thing but then at the same time it is also little bit of deferment into the second half. So, it really doesn’t change the whole demand supply. The second thing is that they have also reduced the overall borrowing itself for the full year by actually reviewing the numbers on small savings and some of the buybacks. Now those are again questions for the market to look at how probable or how realistic those are and that is something which again market will have to deal with at a later point in time.
The most important of the whole rejig on the borrowing program is really the tenure rejig. By actually reducing the supply in the 10-14 year and actually introducing 1 to 4 year and also saying the 10 percent of the issuances will be on inflation linked and floating rate bonds (FRBs), I think the clear message is that we are very sensitive to the demands of the markets. We are very sensitive to the fact that we don’t want to be borrowing to very high levels and if there is not too much appetite in the market then we are happy to relook at it from issuance point of view. That is a very positive thing because that is not something we have seen in the previous years. Now in terms of where the levels are and how much more it could go, I guess the right way to look at it is, if you look at the whole sell-off itself we have moved from something like 6.45 levels to about 7.75 levels.
I think you can attribute, let us say the 130 basis points sell off as roughly about 50-60 basis points because of the fact that market priced out any further rate cuts and said that we might actually have hikes in the coming period. The other 60-70 basis points, we could attribute to the fact that they were supply risk which the market was facing. Right now I think the supplied risk factor is largely reduced. To that extent if you were to take away the move or higher move because of that then you are probably taking about a level between 7.20 and 7.40 percent as a reasonable range for the market to be assuming that we still have to resolve the growth inflation dynamics and where we are on the MPC side.
Nigel: Is the borrowing program good enough for PSU banks to come and buy?
A: Broadly, definitely based on liability growth, the fact that for liquidity coverage ratio (LCR) you need to have a certain amount of increase in your bond positions means that eventually everybody as deposit growth picks up will have to buy. It is also be a little bit a function of how the credit growth happens because what we have seen is after a strong pick up over let us say November to January period question is that is credit growth again going to continue or is there going to be some strolling in credit growth because of some of the recent issues. Just talking about the PSU bank segments I would say that for the market as a whole across all segments the key question really is will people actually add on to duration in a material way at this point in time?
One of the issues for the bond market actually in the last six months was not so much any segment not buying as much as the fact that after a lengthy rate reduction cycle a lot of the market segment was significantly long duration without sufficient time to adjust their portfolios and suddenly you were talking about possible rate hikes by RBI and so on. The question is that will people continue to be in the mode of reducing duration on their portfolios or will people now have some kind of a risk appetite to add to duration. I think that question is not going to be answered or resolved by this particular news of the government rejigging the borrowing program. That will really be more of a function of how the growth inflation dynamics resolve over the coming weeks.
Now that also brings me to some of the risk which continue to be there in the market from a growth inflation point of view. One is oil prices continue to be quite strong. The market will also watch out for what happens on the minimum support price (MSP) because there is a lot of discussions and debates on MSP at a very senior level in the government in the recent weeks. So, where we end up on the MSP increase is something which the market will be looking at. Also whether the state fiscals have actually had a reasonable amount of expansion in the last few months. The question again is, how does that impact the output gap closure and demand perk up and so on. All these are risk factors. The market will be wary about and therefore you would need some more evidence of the fact that inflation is going to be contained and therefore you may not get any rate hikes for market to start adding duration.
Reema: What is your own estimate or your expectation of the yield trajectory, the range for the 10 year for the month of April as well as in the first half of the year?
A: Some more good news can come in the form of higher FPI limits which also I think there was some hint yesterday that in the near future they will announce a revamped FPI limit structure and the expectation is they will possibly allow more room for FPIs to buy.
So, assuming that some of that news also comes through, it is possible that we could trade around 7.20 percent on the 10 year in the coming weeks. Of course we have the monetary policy committee (MPC) in almost like 10 days' time. The broad expectation is for the MPC to continue its current neutral stance without any major tilt on the hawkish side. Assuming that as a base case, then markets could trade a little constructively in the coming weeks.
However in the longer term, some of the other risks like oil, MSP increase, where we are on the inflation, how the state fiscal moves, all of those will weigh. Therefore we see that we would probably be in a 7.20-7.45 percent range till we get more clarity on where we are on the inflation.
Nigel: Would you worry about the second half, maybe too much borrowing, is that possible? Even possibly fiscal slippages?
A: It is too premature to really make any logical guess on that. One of the questions which comes from the recent borrowing announcement by the government yesterday itself is that, would they have enough money to spend if they are curtailing their borrowing programme. They have indicated that they will probably resort to cash management bills and so on. However in the last couple years if you look at it, we have seen lot of government spending in the first half of the year which have actually helped in creating certain amount of growth impetus to the economy. The question really is, would that kind of be somewhat compromised by these decisions. That is something which we will have to watch out.
For second half, the key will be the trends on the collections of GST. We are still to hit the 1 trillion number that most people expected. There is expectation that as things settle down and as more registrations happen and with general growth being better, in next financial year you would see GST increase. If we are able to hit the 1 trillion umber on the GST collections in the next few months, I think the market will be comfortable that the government's fiscal will probably be within the budgeted math.However if we don't hit that, then there will be possible worries about slippages. However it is still some time away.