Even as bond yields have fallen sharply over the last couple of months following a decline in crude prices and strengthening of rupee, a reversal in crude price movement, rupee and rise in inflation may turn things volatile. Ashish Parthasarthy, treasurer at HDFC Bank, told Sandeep Singh that an uncertainty over the outcome of 2019 elections only creates additional volatility. He said that while low inflation has opened up the chance of a rate cut, it is unlikely before April 2019. He also spoke on the elevated risk in the agricultural loan segment and sudden resignation of RBI Governor. Excerpts:
Bond yields have been volatile and with the recent state election results opening up the contest for elections in 2019, how do you see bond yields to be?
From a market perspective there are two factors that determine yields — demand supply situation and sentiment. The fact that no one knows what is going to happen in 2019 elections only creates additional volatility. From a bond market perspective RBI started open market operations and bond yields have come down. In the last monetary policy review they said that they will continue with OMO and that means yields will continue to rule lower. While the yields had gone up on account of rise in crude oil prices, weakening rupee, rate hike expectations in US, an unexpected drop in oil prices, rupee recovery, fed turning benign and reversal of other factors that pushed the yields high led to decline in yield.
How do you see inflation to be and are there any concerns?
As of now, the inflation has been at levels lower than RBIs expectations. We expect that it will continue to rule lower over the next 3-5 months and will remain supportive to the bond yields.
The risk for yields will emanate from factors such as additional borrowing by the government, sell-off by investors and pressure on domestic currency.
Oil prices seem to be contained as of now. While the actual impact of OPEC production cut will be felt in January 2019, the impact of end on waiver on Iran imports will also come into play over the next few months. So, by March 2019 we will see certain changes in the environment that will create some volatility in the market.
With inflation staying low, do you see possibility of a rate cut?
The chances of a rate cut have certainly opened up. Till now RBIs stance had moved from neutral to calibrated tightening but one should see a change in RBI stance back to neutral now. The cut will however, depend upon the forecast for future inflation.
While oil prices have corrected, food inflation has also played a big role. However, you can’t have food inflation going down as if prices are not remunerative, people will stop producing. It has to reverse and I see that happening in the second half of 2019.
Monetary policy net action would depend upon how inflation pans over the next 6-12 months, however, a drop in inflation warrants a change in stance. I think February might be too early for a rate cut. They might wait and see till April before taking a decision to cut the rate. However, the chances of rate cut have opened.
How do you think the market took the sudden resignation of RBI governor and a quick appointment of a new governor?
The fact that there was a quick reappointment helped calm the markets as the uncertainty went away. While the RBI governors sudden resignation came as a surprise, it is important to note that it did not impact the markets much because the conditions were benign.
While the government and RBI have not been on the same line of thought on liquidity situation, how do you see the liquidity situation in the market?
I do not see it to be very tight. Even during normal course of time we see some pressure on liquidity during the second half of the year as the government often reduces it expenditure in the second half, having front-loaded it in the first half of the FY. For a month long period around September, it was slightly uncomfortable but nothing much to be worried about. However, it is relatively better now. Numbers show that even for MSME it is not too bad. The only sector showing lower is micro enterprises and it is not clear if it is on account of reluctance of banks to lend them or on account of low demand.
There is a trend of loan waiver announcements by political parties during elections, do you think its hurting customer behaviour and is there an increase in pressure on agri loans?
There is an elevated risk in the agri sector and announcement of loan waivers is one of the reason. Besides, uneven distribution of rainfall and drop in price of the produce are also adding to the the pressure. Over the last one year, we have only seen an increase in risk in the crop loan portfolio of the agriculture sector.
Given the high volatility in rupee, do you think RBI should enhance its intervention? Where do you see it heading?
The rupee is volatile but so are a lot of other currencies and if everyone is witnessing volatility then intervention will not help and it won’t be sustainable. RBI will continue to intervene to curb volatility. On the range for rupee, I think we should operate between 71-73 against the dollar over the next three months.