The government is set to announce the market borrowing calendar for the second half of the current financial year, later this week. It had front-loaded the borrowing programme in the first half by raising 65 per cent of the Rs 5.7 lakh crore budgeted for 2012-13. It should follow the budgeted plan unlike last year when it overshot heavily leaving the bond markets with a bad experience, says Hitendra Dave, managing director, head of global markets, India, at Hongkong and Shanghai Banking Corporation in an interview withParnika Sokhi. Edited excerpts:
Do you expect the government to overshoot the market borrowing target this year as well?
Based on the statements made by the finance minister, I think the government would announce a borrowing program which does not overshoot the target. Maybe few weeks ago, the bond market was prepared to see some degree of slippage from Rs 25,000-50,000 crore simply because it happened last year, too. The bond markets would be very happy if the government announces it would not borrow more than what had been budgeted.
Where do you see the bond yields, if higher borrowing is announced for the second half of 2012-13?
Right now, markets are not expecting higher borrowing. A marginal slippage of Rs 10,000-20,000 crore would not make a big impact on yields. If it is very high then yields might react. Otherwise, yields would stay within 8.15-8.20 per cent range. Last year, bond yields touched nine per cent as the markets were spooked by the degree of slippage and its inconsistency with the kind of assurances that were given. In fact, bond yields are more likely to drift lower than higher if the supply of bonds eases in the second half. Markets would also expect the central bank to do its bit and deliver rate cuts.
What is the quantum of rate cuts that you expect in the rest of the financial year?
At this juncture, most people in the market are working on the assumption that the RBI would cut policy rates by 50bps in the second quarter monetary policy review in October. It is based on the statements made by the government that there would be more growth supportive steps following in the near term. Thereafter, we would look at the inflation data. However, despite low growth, inflation has not fallen.
What explains the current appreciation in the rupee?
The fuel price hike triggered off the first round of appreciation in the rupee. Then the announcement on FDI came, which reinforced that momentum. Thereafter, there was some political uncertainty which had faded. The impact of the reduced withholding tax on rupee would depend on how much of the funds raised through that route are hedged. As of now, the appreciation in rupee was clearly due to a change in sentiments.
Going forward, where do you see the rupee?
Ultimately, the exchange rate would be decided by the flow of dollars. Now, these measures need to be backed by sufficient tangible action which virtually brings in more dollars. In the current environment, one cannot expect such kind of flows through exports. Hence, it would have to be in the form of portfolio flows. Some projects might need to be fast-tracked which might result in genuine industrial activity and accelerate investment inflows. Rupee might appreciate to Rs 52 per dollar, beyond which markets would see if the government has done sufficiently to address the mismatch between exports and imports.
Do you see companies taking advantage of the relaxation in withholding tax on overseas loans?
The credit spreads for Indian companies have reduced by 40-100 bps in the last couple of weeks. This is the result of measures announced by the government. The international market is reflecting, through rupee and credit spreads, what they now feel about India. We can certainly expect more borrowings done by Indian companies through the offshore market as tax has been lowered and as the currency appreciates, cost of hedging would also reduce. There is money available abroad on account of measures announced by the US Federal Reserve and the European Central Bank. There should be no problem in attracting those funds.
But there hasn’t been much credit demand due to lack of new projects amid economic uncertainty. Why would companies borrow even at a lesser cost if they don’t need funds at all?
In India, there was never an uncertainty over domestic demand. Uncertainties were related to land acquisition, resource allocation and other such policies. So long as we don’t have the problem of lack of demand, people would put up fresh projects if the big picture issues are addressed. Now, we can see that coming through. Sentiment vitiates quickly but it can turn around quickly too.
