{"id":120895,"date":"2021-09-03T18:45:29","date_gmt":"2021-09-03T18:45:29","guid":{"rendered":"https:\/\/fin2me.com\/?p=120895"},"modified":"2021-09-03T18:45:29","modified_gmt":"2021-09-03T18:45:29","slug":"rbi-faces-an-uphill-task-this-year","status":"publish","type":"post","link":"https:\/\/fin2me.com\/business\/rbi-faces-an-uphill-task-this-year\/","title":{"rendered":"‘RBI faces an uphill task this year’"},"content":{"rendered":"

‘It is going to be a tough balance for the RBI to manage economic stability and ensure smooth government borrowing.’<\/strong><\/p>\n

<\/p>\n

With the rise in commodities prices and domestic growth picking up, inflation needs to be watched closely, warns Arun Srinivasan<\/strong>, senior executive vice president and head of fixed income, ICICI Prudential Life Insurance.<\/p>\n

“While the RBI has dismissed the recent readings of consumer price index as being transitory and supply driven, in our opinion, it’s a matter of time before inflation becomes demand driven,” Srinivasan tells Ashley Coutinho<\/strong>.<\/p>\n

What do you make of the recent RBI policy review?<\/strong><\/p>\n

While the RBI kept rates unchanged, this policy was important as it took steps towards rate normalisation.<\/p>\n

Upscaling of VRR (voluntary retention route<\/em>) amount by Rs 2 trillion shows the RBI has started with the gradual withdrawal of surplus liquidity.<\/p>\n

This policy was definitely less dovish than previous ones.<\/p>\n

With growth showing green shoots and vaccination picking up, it is a matter of time before the RBI further increases the VRR amount along with tenure.<\/p>\n

We expect the rate corridor to compress by the end of this calendar year.<\/p>\n

What is your view on trajectory of interest rates?<\/strong><\/p>\n

We expect a gradual grind upwards in bond yields.<\/p>\n

While yields have risen after the policy, further correction of 10-15 basis points can occur.<\/p>\n

The RBI cannot shy away from the fact that the supply this year from the Centre and states is huge and, therefore, there is only limited ammunition available.<\/p>\n

We expect the 10-year G-sec benchmark to inch closer to 6.40-6.45 per cent levels by the end of the calendar year.<\/p>\n

<\/p>\n

What about inflation?<\/strong><\/p>\n

While the RBI has dismissed the recent readings of consumer price index (CPI<\/em>) as being transitory and supply driven, in our opinion, it’s a matter of time before inflation becomes demand driven.<\/p>\n

With the rise in commodity prices and domestic growth picking up, inflation requires a close watch.<\/p>\n

The base effect will be favourable over the next six months, but one needs to watch for month-on-month upticks, especially core inflation.<\/p>\n

How do you perceive the borrowing programme for FY22?<\/strong><\/p>\n

The RBI faces an uphill task this year. There are multiple factors at play and uncertainties that can really swing the Budget projections.<\/p>\n

The pandemic will require continuous government borrowing not just this year, but for the next couple of years.<\/p>\n

It is going to be a tough balance for the RBI to manage economic stability and ensure smooth government borrowing.<\/p>\n

What is your outlook on debt and yield curve?<\/strong><\/p>\n

The current yield curve is one of the steepest we have seen.<\/p>\n

While the shorter end rates have been well anchored owing to liquidity, the longer end remains under pressure.<\/p>\n

We expect interest rates to maintain an upward bias till the end of this financial year.<\/p>\n

In our view, the one to five-year segment of the curve will bear the brunt first when the RBI accelerates rate normalisation. In short, we expect a bear flattening scenario.<\/p>\n

What are the potential hurdles for India’s inclusion in bond index?<\/strong><\/p>\n

India’s inclusion in the global bond indices will go a long way in getting a new set of investors in the market.<\/p>\n

This is needed because for a long time, our bond market has been dependent on banks, provident and pension funds and insurance companies for absorbing the supply.<\/p>\n

However, there are few operational factors that are acting as deterrents for getting India included like a cap on the quantum of investments international investors can make in these funds.<\/p>\n

Since India does not offer full capital account convertibility on the currency, investors rank GoI as having limited liquidity.<\/p>\n

Tax issues also need addressing with foreign investors demanding the Indian bonds be made part of international central securities depositories such as Clearstream.<\/p>\n

We believe the efforts of the RBI’s and government are on the right track and expect traction hopefully by the end of this financial year.<\/p>\n

The anticipation of earlier tapering of bond buying by the US Federal Reserve has pushed 10-year treasury yields to their longest rising run in 6 months. What impact will this have on India?<\/strong><\/p>\n

Our markets have become more and more intertwined with global ones.<\/p>\n

Moreover, the RBI looks for cues from global central bankers, whether it is for rate actions or any unconventional measures and has always taken a leaf out of global central bankers’ books.<\/p>\n

So definitely, US Fed taper will have a bearing on Indian bond yields.<\/p>\n

This can further add on to the upward pressure on yields domestically.<\/p>\n

Feature Presentation: Rajesh Alva\/Rediff.com<\/em><\/strong><\/p>\n

Source: Read Full Article<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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