In general, the fiscal deficit this year is going to be a big challenge because of lower tax flows — both on the GST side as well as the direct tax side.
With the announcement of fiscal measures by the government, the bond market is keenly watching out for the monetary policy in October to assess the quantum of rate cuts. Badri Nivas, head of markets and securities services, Citibank South Asia, tells Bhavik Nair that he expects a 25 bps repo rate cut in the October policy. Edited excerpts…
Tell us your views on the recent fiscal measures.
We view the recent tax changes as more of an important reform, which attempts to enable the corporate sector to recover and get the investment cycle going again.
From a growth perspective, what we would like to see is for the government to build on these measures through further reforms. For example, specific measures around inviting global companies to shift to India, invigorating the export sector, or identifying specific sectors for import substitution and job creation, etc. It would be good if the government can identify three or four themes of this nature and build on these reforms into an overall package. That would ensure a strong push for growth.
What do you think about the fiscal deficit?
In general, the fiscal deficit this year is going to be a big challenge because of lower tax flows — both on the GST side as well as the direct tax side. In spite of the higher dividends from the RBI, I think you should be prepared for some slippage in the fiscal deficit target. Our estimates are that the slippage could be 0.3-0.4% of GDP.
With all the fiscal measures being announced, what is the scope of monetary policy action?
We think the RBI can deliver a 25 basis points rate cut in the October policy. We believe the terminal repo rate is around 5%, given where inflation is. Despite repo rate cuts, credit spreads in India continue to remain elevated and while the RBI’s positive liquidity stance definitely helps this, the lagged benefit of the surplus liquidity in reducing credit spreads will show up by Q1 next year. But we have to look at the structural reasons for the elevated credit spreads and then look at addressing them.
Do you see a sovereign bond issue back on the cards?
If you compare the overall savings in this country and the aspirations from a nominal GDP growth in terms of job creation and other factors, it is very clear we need a lot of foreign capital to finance growth.
So far, the private sector is bringing in foreign capital. It would be good for the government to tap the global capital pool and create some space for domestic savings to be used by the private sector. It is better to go for issuance when you have adequate reserves, operating from a position of strength, instead of at a time when you have a potential currency crisis or macro challenges. We think the timing is quite right now.
Where do you see the bond yields headed?
From a demand-supply point of view, the reason why the bond market has not rallied in spite of rate cuts is that there is a lot of uncertainty on the final fiscal deficit number. When you have the run-rate on tax collections so much behind the budgeted estimates, there is a natural fear about the final deficit number.
That uncertainty will continue till December, when there will be a better handle on where the final fiscal deficit number is likely to come in. We expect the benchmark yield to remain in a range of 6.55-6.60% on the lower side and 6.90-7% on the higher side in this period.