It's time RBI became data-dependent: PNB Gilts MD & CEO Vikas Goel

The government has announced the auction of green bonds for a second straight year. But these might have few natural buyers. PNB Gilts Managing Director and Chief Executive Officer Vikas Goel suggests some incentives. In a video interview with Manojit Saha, he says a statutory liquidity ratio (SLR) or liquidity coverage ratio (LCR) multiplier would make these bonds attractive. Edited excerpts:

It is widely expected that the Reserve Bank of India (RBI) will keep the repo rate unchanged in its October policy review. Do you think it should change its stance to neutral?

It is time the RBI became data-dependent and established a glide path. A change in stance to neutral does not mean a rate cut. Data-dependence means you can raise or drop rates. The present stance is only for raising rates. Yes, inflation numbers were high in July and August because of the volatile components — the prices of food and, somewhat, energy. Core (inflation) has been sticky at 5 per cent, but it is trending down now. Given this, the high headline (inflation) can be addressed. As for energy, it is yet to be seen whether the Organization of the Petroleum Exporting Countries (Opec) will continue to reduce production beyond December. I think energy prices play a limited role, as there is no price change at pumps. Overall, the inflation forecast now – between 4.8-5.25 per cent and 5.40 per cent for September – though above the 4 per cent target, is within the 2-6 per cent range. The high prints seem to be behind us. A glide path, therefore, needs to be established, and a change in policy stance might be warranted.

The borrowing calendar for the second half of 2023-24 was announced recently. With around Rs 2.8 trillion government bonds maturing by March 2024, net borrowing would be under Rs 4 trillion. Do you expect a rally in bond prices?

A lot would depend on the RBI and liquidity. There is a glide path for yields now. The correlation between Indian bonds and the US treasury yields will start reducing as we go along. We focus on the low absolute amount of supply. Along with that, as I said, inflation is trending down. We may not see yields coming down, but it will definitely not go up either.

The government has announced the auction of green bonds for a second straight year. Do you expect a ‘greenium’ on these bonds this time?

There are socially responsible funds investing in such issues globally. But here we do not have natural buyers preferring to buy these. There is no economic reason to pay a premium. So, I do not expect a substantial premium. But it is a Government of India issuance, and given Indian bonds’ inclusion in (JP Morgan’s emerging market) index, we will have a new set of investors potentially looking at India. That might drive some premium. Last year, there was a premium of 5 to 10 basis points. This is a relatively new market even globally — less than a decade old — so the premium that used to be there elsewhere no longer exists. In India, it is difficult to get a high premium — maybe 20-25 paise.

What steps need to be taken to make green bonds popular in India?

Some incentives like an SLR or LCR multiplier could be given. Alternatively, a portion of provident fund investments could be dedicated to green bonds. That will automatically bring a premium, but it will also mean penalising savers. An economic incentive rather than a direction or mandate would be a better way to popularise green bonds.

What kind of inflows do you expect in the run-up to the actual index inclusion?

There will be a crowding-in effect. Passive buyers will start coming in from June. Before that, there would be some active buyers front-running passive ones. I do see some flows, but the Indian government bond market generally has not been of great interest to foreign investors. Risk-adjusted yields are relatively low, and it makes little sense on a fully hedged basis. Some front-running will indeed take place, but the flows might be modest.