Benefits of easy liquidity likely to be visible by end of FY20: R Sivakumar

R Sivakumar says the RBI is promising an 'accommodative' stance

R SIVAKUMAR, head (fixed income), Axis Mutual Fund, says some trends suggest another repo rate cut. But there is also evidence to suggest a rate cut is unlikely in the upcoming monetary policy. In conversation with Hamsini Karthik, he says liquidity has improved significantly in the system, although more push from the government is needed to lift consumption.

Edited excerpts: 

How much has liquidity improved over the past one year? 

Very tight liquidity crunch which we saw last year and possibly for almost two years after demonetisation has changed. We’ve had significant rate cuts. The interbank rate is trading well below the repo rate of the Reserve Bank of India (RBI). There is more than Rs 2 trillion of liquidity in the system and the RBI has changed its stance to ‘accommodative’. Incrementally, I don’t see things getting any worse. But it’s going to take some time to get better. Only by the end of 2019-20 or maybe early next year, will we actually see the benefits of this easy liquidity come into the real economy. 
 

With liquidity at reasonable levels and gross domestic product at a 26-quarter low, how much rate cut is the market pricing in?

Twenty-five basis points (bps) cut is what the market is anticipating. But interestingly the trends are divergent — the shorter end of the yield curve is acting like it is pricing in a rate cut, while the longer end of the curve is behaving quite differently. The RBI is promising an ‘accommodative’ stance — the choices are between a rate cut and a pause. The Rs 2-trillion liquidity in the system means the entire shorter end of the yield curve will benefit. However, worries about fiscal deficit means G-sec yields will not come down. When you look at it from a rate-cut perspective, even if the RBI delivers one, it does not mean that bond markets will perform as you would normally expect them to. 

You’ve been equally vociferous on the need for transmission of rates rather than further cuts… 

That’s right. Even though the RBI has cut rates, those kinds of cuts haven’t come from the banking system. Bank deposit rates and lending rates continue to remain elevated. Until the transmission happens, we won’t see the real economy sputtering to life. The weighted average lending rate by the banking system from December 2018 to date is probably at the same level or maybe marginally higher. While the RBI says that the weighted average lending rate on new loans has dropped, we don’t know how much of that is because of a change in the loan mix. Financial conditions in the banking system are also tight. We also need more government action. 

You are suggesting a personal tax cut?

Proposals like a personal income-tax cut also help in terms of leaving money in the hands of the people because a government expenditure programme could take time. The interesting thing is that the government has actually gone for tax increases in the last one or two Budgets, which is quite strange in the slowdown period. Things aren’t getting worse, but to move into recovery, a few more steps are needed.

Have sentiments with respect to debt funds improved vis-à-vis six months ago?

Credit funds aren’t seeing much inflow. We are seeing significant inflows in the short-term and money in the market space. Investors have shifted from yield-oriented products to safety ones. I see a lot of value in credit because the credit spread is close to a 10-year high. The spread between ‘AAA’ and ‘AA’ instruments is the highest since 2009. In June–July last year, the spread between the two was 50 bps; now it is 100–150 bps. The opportunity for most investors now is to play the shorter end of the ‘AAA’ bonds and wait it out. When sentiments turn, we will see investors coming back to the higher risk category.