SBI Ecowrap - RBI policy makes a clear distinction between strategy and stance: Yields could head towards 6.55%-6.6%

11 Feb 2022 , 08:31 AM

The RBI surprised the market with a policy statement that has a lower GDP at 7.8% and an inflation forecast at 4.5% for FY23. This translates into a WPI projection of around 2.8% in FY23. The lower inflation forecast took the market by surprise and the 10-year yield has declined by 10 basis points and is likely to decline further.

There are 3 bets that the RBI has taken in its quest for a lower term structure of interest rates. The RBI has also clearly indicated to the market that it is comfortable with making a clear distinction between policy strategy and policy stance and these can coexist simultaneously. While a policy strategy may indicate RBI calibrating the liquidity normalization to ensure that government borrowings face no disruption, the policy stance may still indicate rate adjustment to quell inflation expectations, should inflation surprise on the upside beyond tolerance. These two mutually complement each other as RBI has several non-conventional policy tools to adjust Government borrowings.

The 3 bets the RBI has taken are crude prices, US yield and the Government borrowing program that determine yield trajectory will largely be under control. While crude price increase may have bottomed out, the US yields might soften today on the back of lower than expected inflation print. The third and the largest elephant in the room is the size of Government borrowing program. We expect for FY23, the Government has budgeted net market borrowing of R11.2 lakh crore, that however could be lower by at least Rs2.5 lakh crore.

Notably, small saving rates continue to be attractive in terms of rates. In FY22, small savings collections exceeded the budgeted amount by a large Rs2 lakh crore, and that had resulted in net borrowing falling short by Rs1.7 lakh crore. The challenge lies in FY23 with net borrowings increasing by Rs3.4 lakh crore but small savings lower by Rs1.7 lakh crore than the revised FY22 amount. We expect small saving schemes in FY23 continue to surpass budgetary expectations amidst surplus savings of households and large rate differential with bank deposit rates.

Notably, the Government has budgeted Rs1.75 lakh crore surplus cash balances for FY23. But we believe that it might end up having higher surplus cash balances by at least Rs1 lakh crore, which in turn will provide some relief to the market borrowing. Furthermore, if small savings and short term borrowings through treasury bills are higher by another Rs1.5 lakh crore, the net market borrowing of the Government will come down from Rs11.2 lakh crore to Rs8.7 lakh crore.

For FY22 again if we consider there are no borrowing in the remaining part of the current fiscal, the market borrowing would get reduced by Rs71,000 crore, thereby leading to net borrowing of Rs7.04 lakh crore as against the RE of Rs7.75 lakh crore. Clearly, the yields could head lower and even touch 6.55%-6.6% in FY22.

Some of the developmental and regulatory measures also deserve special mention.

First, NPCI in association with DFS, National Health Authority (NHA), Ministry of Health and Family Welfare (MoHFW), and partner banks launched an innovative digital solution — ‘e-RUPI’ in August 2021. The e-RUPI runs on the UPI platform and has a cap of Rs10,000 per voucher and each voucher can be used / redeemed only once.To facilitate digital delivery of various Government schemes to the beneficiaries, RBI has increased the cap on amount for e-RUPI vouchers issued by Governments to Rs1,00,000 per voucher and allowed use of the e-RUPI voucher multiple times.

We believe that this is an excellent step and will promote use of e-RUPI which is easy, safe and secure as it keeps the details of the beneficiaries completely confidential. In future, this could be even be used as digital rupee as the RBI onboards digital currency. Currently 16 banks and 1959 hospitals are live on e-RUPI.

Second, TReDS is an electronic platform for facilitating the financing / discounting of trade receivables of MSMEs through multiple financiers. These receivables can be due from corporates and other buyers, including Government Departments and Public Sector Undertakings. Keeping in view the growing liquidity requirements of the MSMEs RBI has increased the NACH mandate limit to Rs3 crore (from present Rs1 crore) for TReDS settlements.

Even as the market was surprised by the tone of the RBI policy, we believe RBI may have moved ahead of the market in terms of expectation setting. FY23 could usher in a new era of separate strategy and separate stance of the RBI, an unconventional monetary policy setting in the true sense!

The author of this article is Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

The views and opinions expressed are not of IIFL Capital Services, indiainfoline.com