RBI’s neutral stance should be a salve for bond markets: Mythili Bhusnurmath

Talking to ET Now, Mythili Bhusnurmath, Consulting Editor, says going by what deputy Governor Dr Viral Acharya said, perhaps the RBI does not really intend to support the government’s borrowing programme at all.

Edited excerpts:

Very clearly it is the Budget which is now influencing the credit policy whether it is mention of minimum support price or the impact of custom duty. But again RBI on expected lines maintained the inflation warrior stand?
Oh, yes certainly. In fact, the fiscal slippage has always been an issue with the MPC but what is a little surprising is they have maintained their neutral stance. So for now, the RBI is trying to balance the role of debt manager of the government because they have not changed their stance or changed their policy stance for a more hawkish tone. The neutral stance perhaps should be a little bit of a salve as far as bond markets are concerned and that is a takeaway.

As far as inflation is concerned, it is expected to be higher in the first half but inflation in the second half is expected to be a little lower. It would be interesting to see what were the RBI’s reasons for expecting that inflation will come down in the second half. Clearly, RBI is hopeful that the commodity price hike that we are seeing at the moment will not continue and oil markets will retain some semblance of normalcy.

They have also bet on the fact that most of the global central banks will normalize their policy. The Reserve Bank of India clearly is expecting that globally whether it is inflation or bond yields, the direction is going to be north, not flat or south?
Oh, well yes and it is a given. Frankly, as far as the markets are concerned and you see the long faces all around, there are two key silver-linings as far as India’s macros are concerned; one is that when the markets have fallen the way they have, you have seen oil prices also came down a little and that is good news for India as far as the macro economy is concerned.

Second, when we see the US economy recovering so strongly, we will see the dollar strengthening and the rupee accordingly weaken and that again is good news as far as India’s macroeconomy is concerned. It is win some, lose some. So the markets lose, the macroeconomy gains. Altogether we will have to watch out and see what happens this year because it is going to be a year that is going to be very difficult to predict, partly of course because we have a man in the White House who nobody knows which way he will turn and we also have a new head at the Federal Reserve.

Jerome Powell is a completely unknown entity, the first non-economist in 40 years. He is a lawyer. So, one really does not know which way he is going to call. Of course, the general expectation is that Fed rates will continue to be on a gradual upward tick but if the US economy recovers very strongly, the US Fed could go in for a faster normalization and that could perhaps be not very good news as far as India is concerned.

The broader question is that you were sounding rather dim on your inflation outlook. What stops you from changing for policy stance on the rate?
Well yes, actually the RBI policy press releases and the conference that follows after the monetary policy statement have become increasingly more and more brief with very little light on the RBI’s reasoning. So, it has been a little disappointing particularly that there was a question about the special dividend. It would be interesting to see because there is no reason for RBI to kind of disclose its reasons very openly but it would have been good if we knew some positions.

It is a little discouraging to find that the RBI is so hung up about that position about the MCLR and forcing banks almost because it said harmonising. Now what does harmonising mean, that is another disappointment that I have had. As far as the repo rate cut is concerned, nobody was expecting any rate cut or nobody was expecting a rate hike also.

So, to that extent, they have batted as per the overall expectations. But I would have liked a little bit more clarity on why has the RBI kept its GVA estimates the way it has. What is its view on inflation because the HRA etc should not have such a huge impact and MSP again, it is unlikely that the government’s MSP will go up so dramatically as to influence inflation because one must give credit to the government for management of the food economy which has been far better than under the UPA government. So overall, the RBI has perhaps been a little overly cautious. I entirely buy their stance on the rate action but I would have liked a little bit more clarity in terms of explanations in the press conference. It is more or less par for the course.

The governor from the last two or three meetings is now maintaining a case that they see an economic revival round the corner, the capacity utilisation numbers are picking up with each passing quarter. You track them much more in a granular manner than I do but the growth estimate is something which is not getting changed. I have always seen in life that when demand comes in, the demand is going to surprise you. When you are confident of demand and capacity utilisation picking up, why is it not getting captured in the macro communication?
Absolutely. In fact, in this year’s GDP, they have reduced the GVA to 6.6%. I am also a little puzzled why the next fiscal’s second half the growth actually comes down because we are talking about a global scenario where the world economy is going to look up. It should give us some kind of a tailwind but the RBI seems to think that the recovery will be good in the first half but not so much in the second half.

I would have liked a little bit more clarity, a little bit more explanation about the RBI’s thinking so that again is a missing, partly of course it is very difficult to make this kind of projections but very interesting to see what was the RBI’s reading of the situation, both on inflation as well as on GDP, GVA going forward.

One of the things that has been said is liquidity tightening, the government borrowing programme. I know you raised this point early one with poor appetite of banks and tightening liquidity conditions. How do you think the RBI plans to support the borrowing plan of the government?
I do not know but judging from what Dr. Viral Acharya said, perhaps the RBI does not really intend to support the government’s borrowing programme at all which could be another source of contentious relations between the RBI and the government.

I will just read what he said, he said, “the liquidity policy of the RBI will not be to manage the price of any asset,” clearly suggesting that the RBI is not unduly concerned about the price of the asset, quote, unquote, which presumably he is talking about bond prices. Now if that is the case and the RBI is really going to manage its liquidity without keeping an eye on what it means for the yield of government securities, I am not sure what it means for two things; a) the government’s borrowing programme, the cost of its borrowing program and also what it means for the banks’ treasury profits. As it is they are sitting on losses. So can the RBI really afford to turn a blind eye to the price of bonds given that its role is also that of managing government’s debt? I really would like to know what exactly does the RBI mean? Does its focus on inflation make it blind to all its other roles, I am not sure and I am not sure whether the government will be happy to hear that either.