We expect borrowing numbers to be on the higher side in the Budget, says LIC MF's Marzban Irani

In the upcoming Union Budget, we expect the government's borrowing figures to be on the higher side, as in 2024 we are going to have elections. So, 2023 might see a populist Budget, said Marzban Irani, Chief Investment Officer (Debt), LIC Mutual Fund Asset Management Ltd, in an exclusive interview with Moneycontrol.

He said that in 2023, the government will have to spend before the elections. He expects the borrowing numbers to be on the higher side for the government to have the leeway to spend on infrastructure and such like, because the last two years (COVID period) were bad, and not much work could be done in these areas.

Edited excerpts from the interview:

Considering the easing crude oil prices and hawkish US Fed, where do you see bond yields, going forward?

In the last few months, bond yields have been declining. Since July this year, we have been giving this view that bond yields will continue to decline, as we believe they may have peaked. This, because we have done an analysis post Dr. Rajan left. He has done a lot of things on inflation targeting. We took that period from, say 2016 till now, and we saw how many times the 10-year G-Sec yields have crossed 7.75 percent.

We found that it was hardly 13-14 percent of the time, which means that more than 85 percent of the time yields were below 7.75 percent. So, we were very clear that there are slim chances of yields going to 8 percent. Hence, from early July, we started saying that whenever yields touch 7.50 percent, that's a good time to enter into long-term funds. And then, to remain patient and stay invested for three years; investors can claim indexation.

Now, the yields have almost peaked, and I think most of the market participants have realised this, and the yields have started declining. Markets normally tend to react a little prior to the event, say two-three months.

With oil prices declining, coupled with the hawkish stance of global central banks, markets are now expecting yields to gradually start declining. Most of the market participants ― PDs, insurance or mutual funds ―are participating in building up duration, and accordingly, investors are buying into that argument.

We have seen oil decline. RBI’s target was around $100, We are seeing around $80 at the moment. So, for example, in the coming policy, we might see the RBI saying that we made our estimate of $100 and now it is at $80. So, that may be positive for the fixed income markets. Oil prices have also played an important role, with India being a net importer of oil. Oil prices have declined; that's a big thing for us.

That's why we feel the yields may gradually move lower, … and stop at some point. At the moment, it's not a rate-cut kind of scenario. We feel rates might remain here, and then gradually start declining. So, the main decline comes from 7.50 percent to 7 percent, and then gradually it will go towards 6.75 percent. You might see yields fall sharply from 7.50 to 7 percent, and thereafter the decline could be gradual.

In what range do you see bond yields by the end of this quarter, and next quarter?

(For) this quarter-end, most of the things are discounted. The policy in December will give further cues. We expect that policy should be positive this time, and yields might decline to around 7.10-7.15 percent levels, and then by March may gradually go towards 7 percent. So, yields may come down sharply during this time, and then it may remain at 7 percent for some time and then decline.

Yields are not declining at a fast rate at this point in time because nationalised banks have been selling. We have seen this month around Rs 26,000 crore of net selling by banks. That's because credit offtake is in double-digits ― last we saw was 17 percent, and deposit has not increased at the same pace. And hence, they are dipping into the SLR and fulfilling those obligations.

Also read: Benchmark bond yield to trade between 7.20% and 7.40% in near term: Dealers

What are your inflation expectations for the near term? What should the RBI do to control inflation?

I think, on inflation RBI has been very vigilant. In recent quarters, inflation all over the world shot up in a big way. The reason for the sharp rise in inflation globally was the excess liquidity, led by fund infusion by central banks and war-led supply disruptions. The last inflation number we saw below 7 percent in the domestic market. And that was mainly because of the base effect. But as we go ahead, we are expecting inflation to gradually decline by March.

Food prices are declining because of the winter season. And now oil prices are also declining. These were the main two reasons globally too, because of which inflation was inching upwards. By March, we'll see lower numbers. But at the same time, I would say that we are not seeing those 2-3 percent type of inflation. But gradually by March to June-end, we might see below-6-percent kind of inflation, which will be in the RBI’s target band of 2 percent to 6 percent.

Do you think that in the upcoming policy, the RBI will project a lower inflation?

I think, the RBI should project lower inflation, with a caveat that we'll be watching it closely. Because oil prices are not under control totally, and there are a lot of geopolitical risks associated with oil. And, winter will be over by December. Hopefully, overall food prices may decline. Core inflation has been sticky at around 6 percent. That is something which the RBI should target, and that may come down in a very gradual manner, and very systematically, but the headline inflation may come down. Headline inflation has shot up in a big way.

So, it should come down at that pace. So, headline, we are expecting to come down faster, but core will come down gradually. Whether you look at medical cost, or education cost, that has been going up all over the world, and that is not going to come down easily. Hence, unless the government provides adequate healthcare facilities and relief in education-related costs, inflation may remain elevated.

Also read: India's growth rate cycle has likely peaked, says Nomura

What are your expectations from the Budget?

As far as fixed-income markets are concerned the main interest that we have in the Budget is on the borrowing numbers, and we expect that to be on the higher side. Last year too, the government spent a lot on infrastructure and such others, and hence, borrowing was on the higher side. In 2024, we are going to have elections. So, 2023 might see a populist Budget. In the next year (2023) they will have to spend before the elections.

So, that Budget number on the borrowing side will be on the higher side; we are expecting mostly for that number to be on the higher side, so that they have the leeway to spend on infrastructure and such like, because the last two years (COVID period) were bad; not much work could be done on infra and other things. So, from this year onwards, the government is bang on to cover up that too, for growth, employment and other things. We feel that the numbers should be on the higher side, similar to probably what we had this year on the gross borrowing of around Rs 12 lakh crore.

It could be one lakh crore here or there. But you know, the good part is that this borrowing has been absorbed by the domestic investors. There is talk of India’s bonds getting included in the global index. By Budget, we'll come to know that also. If that happens, there'll be demand from foreign investors also. That is one more reason why yields might decline.

What are your expectations from the policy?

On the policy front, we are expecting a hike of 35 basis points (bps), taking the repo rate to 6.25 percent, and we feel that the terminal rate should be in the 6.00-6.50 percent range. We feel not much will happen probably after 6.25 percent. We also feel that probably in December the pace of rate hikes may reduce.

The US Fed does say 50 or 25 gradually. So, we may see three or four rate hikes by the US Fed, going ahead. Similarly, here. Maybe we might see one or two rate hikes, but that will not really matter to the investor because those are like the last hikes and people are expecting it to reverse from thereon. Inflation should be a little lower than projected, because now the base effect has gone, and is declining; food prices too are declining. So gradually, I think we should see a lower number. On GDP, we have to see the number this month-end.

I think, growth numbers should be in the 6-7 percent range because there'll be gradual growth over the next few years. But keeping the China Plus One policy, a lot of foreign investors are realising that China is not the only hub where they need to put their factories and manufacturing. Taiwan has benefited in a big way. And now I think, India will also see that and this will be reflected in the equity markets.