Panglossian outlook and deepening of the India Bonds Market

A couple of days back, the Governor of the Reserve Bank of India, Shaktikanta Das, while speaking at an annual banking summit ‘FIBAC 2019’ (organised by the Indian Banks’ Association, FICCI & BCG) stated: "Mood of doom and gloom is not going to help anyone. I am not saying we maintain a Panglossian countenance and smile at everything — I don’t expect people to smile away difficulty — but a mood of doom and gloom will not help anyone." 

'Panglossian' means excessively optimistic. The term originates from the character of a satirical novel by Voltaire – Professor Pangloss, an old tutor who is an incurable optimist even after experiencing great cruelty and suffering.

RBI Governor at a session of the FIBAC conclave in Mumbai on August 19, 2019: Photo courtesy: Twitter/@ficci_india
RBI Governor at a session of the FIBAC conclave in Mumbai on August 19, 2019: Photo courtesy: Twitter/@ficci_india

The Governor went on to add that “at this particular juncture, growth is a matter of highest priority. This is something which financial sector representatives, the banks, leaders from business and everyone involved in policymaking, including regulators are concerned with. Growth today is a matter of highest priority.” To reboot the sluggish economic growth, he was of the opinion that "Not just from monetary policy but also through transmission. So, our expectation is that banks should move faster on rate cut transmission.” 

Global central banks have moved to a rate softening regime to boost slowing economic growth. This has fuelled bond market rallies worldwide. The US Fed cut rates in the backdrop of low inflation and global developments adversely impacting growth prospects. And more rate cuts may be expected in future. As trade wars and protectionism continue to build up, global economic slowdown is witnessed. Therefore, central banks have resorted to lower interest rates in an attempt to support economic growth. 

Indian domestic bonds have witnessed a sharp rally as the RBI cut policy rate by 35 basis points earlier this month, as well as due to the rate cut by the US Fed. Benchmark government bond yields recently dipped to a 10-year low. RBI policy (repo) rates have been cut by 110 basis points to a nine-year low of 5.4%. As discussed in earlier articles on the bond market, yields and prices are inversely related, and therefore, as yields go down investors are in the money.

RBI’s consumer confidence survey for the three months ended July 2019 indicates that households feel that the economy has worsened since the previous quarter, with expectations of further worsening in the future. In this situation, households typically postpone spending until there are clear signs of economic improvement. The signs of improvement depend on a combination of factors, which include inflation, income and employment. We can thus expect further action by RBI to boost consumer confidence through another rate cut as inflation continues to be benign. This makes the bullishness to continue in the Indian bond market.

The Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman addressing a press conference, in New Delhi on August 23, 2019.
The Union Minister for Finance and Corporate Affairs Nirmala Sitharaman addressing a press conference, in New Delhi on August 23, 2019. Photo courtesy: PIB

The latest booster dose to the market is the announcement by the Finance Minister, Nirmala Sitharaman that the government will soon work out an action plan to deepen the corporate bond market in India, in order to make domestic bonds market more conducive to investors and bond issuers and for better price discovery.

She clarified that this would include the development of credit default swap market in consultation with the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi), as well as focus on corporate bond repo market that provides an opportunity to borrow against securities and provides short-term liquidity to participants.

These measures would greatly aid the efforts by RBI and SEBI who have come out with a framework that ensures corporates will bring down their reliance on banks by tapping the bond market for their financing needs. Starting this fiscal year, large corporates must raise 25% of their incremental borrowings through bond issuances.

However, markets tend to factor in future anticipated events in advance, and thus it may be safely assumed that the positive outcome of future RBI and government actions are at least partly priced in. And, due to daily news flows and government stimulus packages anticipated to put pressure on fiscal deficit, the bond market will remain volatile.

The benchmark 10-year government bond that was near 6.30% on the RBI policy date (7th August), crossed 6.60% a few days back is presently around 6.56%, and the 5-year benchmark that was below 6.25% post-policy later tended towards 6.50% and is around 6.37%. This market risk is unavoidable on a day-to-day basis as volatility in yields and prices would be there. But for both the medium-term and the long-term investor, the bond market in India continues to be quite attractive.

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