‘Banks will see MTM losses at current yields’

Rising bond yields over the past few days amid a surge in commodity prices have created a flutter across global financial markets, including India. MURTHY NAGARAJAN, head of fixed Income at Tata Mutual Fund, tells Puneet Wadhwa in an interview that markets here have been spooked by the Reserve Bank of India’s (RBI’S) announcement of variable repo rate auctions to suck out excess liquidity. Edited excerpts:

Has the sharp spike in bond yields taken markets by surprise?

Commodity prices have gone up and global yields have moved on expectations of higher inflation going ahead. The Indian government has announced additional borrowing of ~80,000 crore for the current financial year and borrowing programme of ~12.8 trillion for financial year 2021-22 (FY22). RBI has decided to devolve the auction as it is not comfortable with the current yields. As primary dealers are leveraged, they sell the paper at lower levels to get rid of the stock. Banking system liquidity continues to be adequate and banks are flush with funds. However, RBI intervention has been sporadic and it is not showing a commitment to defend levels, unlike the other central banks that are walking the talk.

What measures do you expect from RBI over the next few months?

The market has been spooked by the announcement of variable repo rate auctions by RBI to suck out excess liquidity, which is the result of RBI’S intervention in the forex markets. It is stopping the central bank from conducting more open market operations (OMOS). We expect RBI to do more OMOS during this financial year-end to protect banks’ balance sheets.

Most central government borrowing has taken place when the 10-year yields were below 6 per cent. The current yields will lead to mark-to-market (MTM) losses for the banks and deter them from supporting the government’s huge borrowing programme.

Do you expect RBI to hike key rates anytime soon?

Rate hikes will be difficult in this type of environment with consumer price index (Cpi)-based inflation within their target range. We can expect rate hikes when the borrowing programme comes down and economic growth prospects are strong.

What has been your strategy, given the recent developments?

We are still in a low growth environment and global markets are running ahead of fundamentals due to easy liquidity. We have been reducing our maturity across our schemes for the last two months. Investors need to be patient and expect accrual returns in high quality debt funds.

To what extent are markets pricing in a higher inflation and wider fiscal deficit?

In the last two weeks, markets have factored in higher inflation and wider fiscal deficit to a large extent. Globally, debt markets are supported by central banks. In the Indian context, this is happening in a piecemeal way, which is creating a flutter in the bond markets.

US treasury yields are rising at a time when there is inflation risk due to the uptick in commodity prices. Do you see a more coordinated action by global central banks to check this?

Many central banks have been intervening in the forex and bond markets to stabilise and aid growth impulses in the economy. The rise in commodity prices, to some extent, is due to a weak dollar. At present, most central banks are operating in silos and commodity exporting nations are benefiting from this development, which may make global coordination difficult.