Heavy government borrowing continues to remain a matter of concern, even as the Reserve Bank of India (RBI) has been actively supporting liquidity in the system through bond purchases. Jayesh Mehta, managing director and country treasurer at Bank of America, shares his views with Parnika Sokhi on the current money market conditions and his expectations from the upcoming mid-quarter monetary policy review. Edited excerpts:
Where do you see bond yields heading this year, when the government has planned heavy borrowing?
Yields were expected to firm up this year, but that isn’t the case now. Since last month, the net supply to the market has been low because of bond purchases by RBI. So, virtually, you are changing your view every second or third day, as it depends on so many parameters. From that perspective, it is a very challenging market. So, you are not able to see a particular trend, with yields either going up or down. We are living by views foreseeing not more than two or three days. But once things improve, yields should ease to below eight per cent levels by the end of current financial year.
What are your expectations from the mid-quarter policy review to be held on June 18?
Global uncertainty and staggering domestic growth have given rise to expectation of rate cut, but at the same time, you have concerns of heavy government bond supply and inflation. After looking at the GDP (gross domestic product) data announced recently for January-March 2012 quarter, we are expecting a rate cut of 25-50 bps in the mid-quarter policy review. There could be a cut in the cash reserve ratio if liquidity continues to remain tight.
Going forward, how do you think the liquidity conditions will pan out?
We were not expecting RBI to come out with OMOs (open market operations) as early as in March, but the volatility in the foreign exchange market forced the central bank to intervene and the liquidity got impacted. So, the only way to offset the impact was to conduct OMOs.
This, coincidentally, helped the bond yields, as they did not harden to nine per cent levels, as expected earlier. Going forward, the liquidity situation may depend a lot on the central bank’s foreign exchange intervention, as credit growth generally remains muted in the first quarter of the financial year.
What can be done to develop the corporate bond market?
One should really look at revising the withholding tax for foreign institutional investment in bonds. For them, investing in bonds is a margin game where they hardly earn one-two per cent. Now if you are going to charge 20 per cent tax on gross income from a 10 per cent coupon rate bond, why will they invest? It has to be drastically brought down to make debt attractive. It will solve two problems — it helps the government securities market and you won’t need to go for Resurgent India Bonds or India Millennium Deposits.
Recently, banks have launched internet platforms to enable retail participation in government bonds. What do you think will be the response?
Unless there is an attraction, why will anybody buy government of India bonds when bank deposits are giving you higher returns? There is no rate or credit advantage. It is not a question of access. If government debt is made attractive, people will figure out a way to invest and take advantage.