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