‘RBI will Walk the Talk, Liq­uid­ity Deficit Should Come Down’

The Economic Times - - Money -

The Re­serve Bank of In­dia may have de­liv­ered a 25 ba­sis points rate cut, but its mea­sures aimed at eas­ing cash crunch in the sys­tem have ac­tu­ally bright­ened the fu­ture for rate cut pos­si­bil­i­ties, says Jayesh Me­hta, coun­try trea­surer, Bank of Amer­ica Mer­rill Lynch. Talk­ing to ET’s Saikat Das, Me­hta says there’s no rea­son why overseas funds will not flow into In­dia, given that all macro fac­tors are in place. Edited ex­cerpts:

How do you de­fine the RBI pol­icy ac­tion? Will the liq­uid­ity mea­sures ease rates fur­ther? Ad­dress­ing liq­uid­ity needs and bring­ing the sys­tem deficit to neu­tral­ity will have a big­ger im­pact than say, a 50 bps rate cut. Today’s (Tues­day’s) an­nounce­ment will cre­ate room for trans­mis­sion of the past cuts. This will be the first time we will move out of sys­tem deficit on a planned ba­sis. I think the mar­ket has not yet gauged the scope of what it is to get out of deficit liq­uid­ity to neu­tral­ity. I am quite con­fi­dent that once the RBI has an­nounced, it will walk the talk and the deficit should come down to about ₹ 25,000 crore (soon). Also, when we are talk­ing about durable liq­uid­ity as and when for­eign de­posits ma­ture in the third quar­ter this year, the forex part is taken care of, but that will also im­pact lo­cal liq­uid­ity to the ex­tent that is pro­vided from re­serves and not for­ward pur­chases and this needs to be re­placed. As this will be durable liq­uid­ity which will be go­ing out, this needs to be in­fused. This will also aide in de­mand-sup­ply of gov­ern­ment bonds and be a big rea­son for bond yields to go down.

Will this year see any fresh flows? I see no rea­son why fresh flows will not come back. The world is in a de­fla­tion­ary mode, we do not see any­thing chang­ing dra­mat­i­cally as of today. And In­dia is in such a sweet spot. Com­mod­ity prices are low and In­dia is a large oil im­porter. We are cur­rent ac­count sur­plus there. All macro pa­ram­e­ters are ticked and are in the right place. We are in a po­si­tion of rel­a­tive strength.

But are sovereign funds los­ing con­fi­dence in In­dia? A lot of oil-based sovereign funds have been re­duc­ing their as­sets di­rectly or in­di­rectly. Some in­vest through as­set man­age­ment com­pa­nies, and the flow went out through redemp­tion at the AMC level. With fis­cal deficit tar­get un­changed, con­fi­dence in In­dia is back. With ad­di­tional in­vest­ment lim­its, we ex­pect to see fund flows in­creas­ing. Last year, we did not get FPI num­bers, but FDI num­bers are en­cour­ag­ing.

Has the in­vestor mood changed af­ter the Bud­get an­nounce­ment? Just be­fore the Bud­get, peo­ple were de­jected. A 125 bps to­tal cut over the past 14 months was more than ex­pected but un­for­tu­nately there was zero trans­mis­sion of that. Many overseas in­vestors had in­vested money ex­pect­ing cap­i­tal ap­pre­ci­a­tion which did not hap­pen af­ter the rate cuts.

How im­por­tant is fis­cal deficit tar­get for debt mar­kets? There is a roadmap for fis­cal deficit. If your fis­cal deficit varies in small ranges, does it re­ally mat­ter in the larger pic­ture? A 20 bps dif­fer­ence would be a mere ₹ 26,000 crore. It does not mat­ter too much as we do not have enough forex bor­row­ings; our bor­row­ing is mostly lo­cal. To that ex­tent, we are fund­ing fis­cal deficit within the coun­try. But a 3.5% fis­cal deficit is not sac- ro­sanct — there should be a range. The gov­ern­ment has pro­posed a com­mit­tee, which would be set­ting a range for fis­cal deficit tar­get.

Is the gov­ern­ment spend­ing enough? The gov­ern­ment should step up pub­lic ex­pen­di­ture, more so be­cause the pri­vate sec­tor is los­ing ap­petite. Ac­tiv­ity in some ar­eas is very vis­i­ble such as roads, railways, de­fence. But, there’s a ges­ta­tion pe­riod for such projects, they need time to yield re­sults. Only the im­ple­men­ta­tion and ex­e­cu­tion need to be in­ten­si­fied.

Where do you see bond yields in the next few quar­ters? I do not see any rea­son why the bench­mark yield should not come down to 6.50% against 7.45% now. I ex­pect it will fall to that level, push­ing prices up next over the two-three months.

RBI has again opened up lim­its. How are FPIs ex­pected to re­act? De­spite the 150 ba­sis points rate cuts over the past 15 months, rates have not come down dra­mat­i­cally, which have dis­il­lu­sioned many overseas in­vestors. In­vestors will in­vest more when they see an op­por­tu­nity to make money.

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