Stating that the RBI has surprised everyone with its status quo on rates and accommodative stance for the 10th time in a row and a lower forecast for inflation and growth for FY23, SBI Research said that with this, the central bank has set a clear distinction between policy strategy and policy stance and that these can coexist simultaneously. As result, the bond yields have shed seven basis points (bps) to 6.73 per cent on Thursday after touching 6.88 per cent on the Budget day when the government said it would borrow a record Rs 14.3 lakh crore to fund its capex (capital expenditure) plans of Rs 7.5 lakh crore.
On Thursday, the Reserve Bank of India (RBI) surprised the market with a policy statement that has a lower gross domestic product (GDP) at 7.8 per cent and an inflation forecast at 4.5 per cent for FY23. This translates into a WPI (Wholesale Price Index) projection of around 2.8 per cent in FY23. The lower inflation forecast has taken the market by surprise and the 10-year yields declined by seven bps to close at 6.73 per cent after falling 10 bps immediately after the policy was announced.
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SBI Chief Economic Advisor Soumya Kanti Ghosh expects the yields to decline further to settle at 6.55-6.6 per cent. He also said that even though the market was surprised by the tone of the policy, the RBI may have moved ahead of the market in terms of expectations.
As a result, FY23 could usher in a new era of separate strategy and separate stance, an unconventional monetary policy setting in the true sense, Ghosh added. The RBI has taken three bets in its quest for a lower term structure of interest rates and while doing so, it has also indicated to the market that it is comfortable with making a clear distinction between policy strategy and policy stance and that these can coexist, Ghosh said.
While a policy strategy might indicate the RBI calibrating the liquidity normalisation to ensure that government borrowings face no disruption, the policy stance may still indicate rate adjustment to quell inflation expectations, should inflation surprise on the upside beyond tolerance, he said. These two mutually complement each other as the central bank has several non-conventional policy tools to adjust government borrowings, he added.
Explaining further, Ghosh said the three bets are crude price, US yields and government borrowing programme that determine yield trajectory and these will largely be under control. While crude price increase may have bottomed out, the US yields are on the northward side due to a record high inflation print of 7.5 per cent, which is a 40-year-high level.
The third and the largest elephant in the room is the size of government borrowing (net market borrowing of Rs 11.2 lakh crore, and gross of Rs 14.3 lakh crore) which he expects could be lower by at least Rs 2.5 lakh crore. Notably, small saving rates continue to be attractive. In FY22, small savings collections exceeded the budgeted amount by Rs 2 lakh crore, resulting in net borrowing falling short by Rs 1.7 lakh crore and the challenge lies in FY23 with net borrowings increasing by Rs 3.4 lakh crore but small savings lower by Rs 1.7 lakh crore than the revised FY22 amount.
He expects small saving schemes to continue to surpass budgetary expectations amid surplus savings of households and large rate differential with bank deposit rates in FY23. This is because the government has budgeted Rs 1.75 lakh crore surplus cash balances for FY23 but it could end up having higher surplus cash balances by at least Rs 1 lakh crore, which in turn will provide some relief to the market borrowing, he said.
Ghosh added that if small savings and short-term borrowings through treasury bills are higher by another Rs 1.5 lakh crore, net market borrowing will come down to just Rs 8.7 lakh crore, massively down from the budgeted Rs 11.2 lakh crore. Similarly, if there is no more borrowing in the remaining part of the current fiscal, market borrowing will come down by Rs 71,000 crore, leading to a net borrowing of Rs 7.04 lakh crore as against the revised estimate of Rs 7.75 lakh crore. This could help the bond yields head southwards and even touch 6.55-6.6 per cent in FY22.
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