http://sharetipsinfo.comJust get registered at Sharetipsinfo and earn positive returns
In the upcoming meeting, we expect Monetary Policy Committee (MPC) to build a case for modest and measured policy tightening, in order to keep bond market sentiments in check.
Finally, it feels like we’re past the pandemic after a long-drawn encounter. It has had a scarring effect not just on our lives but also on the global economic landscape. While the fiscal and monetary impetus provided during the pandemic ensured a quick economic turnaround, in its aftermath the financial system is now left to support record-high sovereign debts and rich asset valuations with little or no central bank support. This transition from pandemic to endemic, although much desirable, is turning out to be an uncomfortable change for stimulus-addicted financial markets.
In a bid to counter the pandemic, governments across the globe had loosened the purse strings on borrowed money. In the US, notional government debt just hit a record $30 trillion, with their debt to GDP ratio at 125 percent against 104 percent just before the pandemic. In India, the notional outstanding government securities is projected to cross Rs 90 lakh crore by the end of FY23, up 50 percent from Rs 60 lakh crore in FY20. In spite of such large increases in borrowings, sovereign bond yields were thus far orderly because the bulk of these debt issuances were supported by central banks buying.
Also read: Life insurers' new premium income up 3% to Rs 21,957 crore in January
This central bank support to government borrowing was a great source of market comfort while it lasted. But for every stimulus sugar rush, there is a bitter tapering pill. The ongoing transition from pandemic to endemic means that excess monetary accommodation is being scaled back. A high level of “not so transitory” inflation is only serving to accelerate this process, as central banks increasingly find themselves falling behind the curve. In other words, monetary policy normalisation is closely following our exit from the pandemic.
On the other hand, the glide path to fiscal consolidation is a relatively slow process. Hence, government borrowings are likely to remain elevated. Absent central bank buying, bond markets will now have to absorb this high supply predominantly on their own. The US Federal Reserve, for instance, is concluding its asset purchase programme by March and has already signalled monetary tightening soon after. The Bank of England has delivered two consecutive rate hikes and the Reserve Bank of Australia has recently put an end to its government bond purchases.
Also read: Cut in funds for welfare schemes; no steps for inflation or job creation: Shashi Tharoor on Budget
ided the necessary emphasis on capital spending, but that has come at the cost of a large borrowing programme for FY23. Even as headline inflation remains within the Reserve Bank of India’s (RBI) target band, inflationary pressures persist as oil inches up towards $100 a barrel and WPI inflation remains in double digits. With policy normalisation already underway, RBI support to bond markets is expected to remain constrained. This has weighed on bond market sentiments. However, the recent sharp rise in bond yields may already have tightened the financial conditions a bit too hastily for RBI’s comfort.
In the upcoming meeting, we expect the monetary policy committee (MPC) to build a case for modest and measured policy tightening in order to keep bond market sentiments in check. We believe the MPC will gradually normalise the repo rate-reverse repo corridor (to 25 bps) over the next two meetings, starting with a 20 bps reverse repo rate hike in February. Subsequently, the MPC will change its accommodative policy stance to neutral, eventually embarking on a gradual rate hike cycle.
Also read: Budget 2022| PSUs are due for upwards re-rating, even with the lower disinvestment target: ICICI Prudential’s S Naren
In our view, MPC guidance on liquidity normalisation may also be equally unhurried, with the introduction of incrementally longer tenor VRRRs (variable reverse repo rate) over a period. Difficult as it may be, going forward, the RBI has to deftly and non-disruptively juggle its conflicting objectives on inflation, liquidity normalisation and management of the government’s borrowing program. Along the way, sometimes the market may remain orderly, but at times it may not.