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00:00 Let's get to the big story this morning which we're trying to break down in terms of impact.
00:04 In a significant move, the RBI's board of directors approved a record transfer of
00:09 over two lakh crore rupees to the central government. Dr. Dipali Panth Joshi, former
00:16 executive director of RBI joins us now on this. Dr. Panth, very good morning to you and thank
00:20 you for speaking with us here at NDTV Profit. Good morning.
00:25 Good morning, ma'am. Just wanted to get your first sort of take on this. Now, a lot of
00:30 interpretations of its impact in terms of how it will help the government's fiscal deficit targets,
00:36 etc. But what is it telling us about the health of the RBI's own balance sheet and the economy?
00:44 Let me start with your take on that. Wonderful. You really put it very well. It shows you that
00:50 the balance sheet of the Reserve Bank, which of course plays a very critical role in the
00:54 functioning of the economy, is very, very healthy. And it's grown and the RBI has minimized its
01:01 expenses and it is a big bumper surplus to give to the government. Now, as I can tell you that
01:09 the RBI is the banker to the government, which of course you know, and it's also the debt manager
01:16 of the government. To put the relationship between the RBI and the government very simply,
01:23 for your viewers, let me say that it's like the relationship between a very stingy wife
01:28 and a very extravagant husband, who will always keep asking for funds. But when the funds are
01:35 required, as in this case, for developmental functions, and development functions are very
01:41 necessary to support national objectives, then the wife reaches under the mattress and coughs out.
01:46 So how have we done that? We have got this bumper reserve because we have revaluation of our assets,
01:54 foreign currency assets, gold, including gold deposits, gold held in India, which constitute
02:00 about 72.34% of our total assets, and these have increased. Then there are domestic assets,
02:08 you know, the penalties on banks and so on. And the increase on the asset size has been due to
02:15 the rise in foreign investment, gold loans and advances. And Tamanna, these are all audited
02:20 accounts, which are as per the RBI. Right. We also have R S Sivakumar,
02:25 head corporate strategy at Axis Mutual Fund now joining in. Good morning, Mr. Sivakumar. It's a
02:32 pleasant morning to be going into work, I'd imagine, with RBI's bonanza to the government
02:37 with a 2.1 lakh crore dividend payout. What is this going to mean for the fixed income market?
02:43 We did see yields dip below 7% yesterday, but do you feel like the next couple of days and
02:48 weeks could continue to see M2M gains on debt portfolios? Hi, good morning. And yes, obviously,
02:56 it's great news from a bond market perspective to get a large RBI dividend and that the market will
03:03 then look at this as a significant move in terms of fiscal consolidation. The government has in its
03:10 interim budget already pegged a fairly better than expected path of fiscal consolidation,
03:17 and this will go some way towards assuring in some sense that those objectives will be met.
03:23 I think the larger message is that this greater than expected, I mean, it's almost twice as
03:30 expected size of the dividend is definitely going to help the government meet its fiscal objectives.
03:39 I will urge some caution in over-interpreting this because remember that this is only an
03:45 interim budget, so we will get a final budget after the election. And so the bond market will
03:50 wait for that to make up its mind about the trajectory of rates going forward.
03:54 Of course, the fiscal surprise will only be positive once we know where that money is going
03:58 to be spent. But first up on liquidity, do you feel like there could be an immediate impact on
04:02 market liquidity after this bonanza? Yes. So one thing that we've observed in recent past
04:08 is that liquidity has gotten tight as government coffers have gotten full and the expenditure in
04:14 some sense has been, shall we say, not forthcoming ahead of the election. And so you have seen some
04:19 amount of liquidity getting tight. This move in itself does not change that because it essentially
04:24 adds more to the government coffers. So we will have to wait for government to start spending
04:29 to have an immediate or a decently large impact on the liquidity in the system. But we do expect
04:34 to see that over a period of time, though may not be in the next couple of weeks.
04:38 Siva, hi, Neeraj here. Good morning. Good time to load on to bond portfolios. The debate around
04:45 rate cuts may continue, but this at least on the Indian side, this gives comfort on the glide path
04:50 for sure. I think it does, Neeraj. I think we've lost Sivakumar. Okay, we'll try and get that back.
05:01 Dr. Pant is with us as well. Dr. Pant, lovely comment, by the way. This is Neeraj here. Good
05:05 morning. Lovely comment at the start about how you set up the trajectory. Just one question,
05:10 though. Did anything in that announcement surprise you at all? Or was this part for the course
05:16 looking at the numbers at the Reserve Bank per se? No, not at all, because there is a provision
05:24 for the RBI's contingency reserve. And Neeraj, this is absolutely something which happens
05:30 every year. And it will vary as to the, according to the income of the RBI. It's in terms of the
05:37 RBI Act schedules 1934, and the audited accounts. And it gives a lot of money and elbow room for
05:46 expansion and for scorching economic growth. So if we are going to be the second largest economy,
05:54 then yes, we have to have a lot of money to spend, which the government now gets. And
05:59 it is the due of the government. And it will help the private sector because there will be no
06:10 crowding out of expenditure. The private sector need not put its expansion plans on hold,
06:19 because there is a lot of money and the government may not restrict its infrastructure spend,
06:25 because there is a lot of money, which gives comfort to everybody, every time.
06:30 Right, right. No, that's a fair call. While we're waiting for the elusive private capex to come
06:36 forth in its true form, it hasn't quite done that thus far, selectively, maybe, but not quite. Okay.
06:41 Thanks for that point, Dr. Pant. Siva, you're back. We just lost you. I was just asking if
06:47 this is a good time to think of loading up on bond portfolios. Lots of events around the corner.
06:52 Yeah, but most of them positive. So I think we've been saying for some time that it is a good time
06:58 to be invested in bonds. We are on the cusp of the index-related flows, this dividend. So I think
07:06 from a bond market demand supply perspective and overall, like I said, the fiscal consolidation
07:12 path, the demand supply characteristics sound good. More importantly, the inflation, especially
07:19 core inflation, continues to remain low. And if food inflation catches up to core, I hope that
07:25 happens, then we are looking at significant rate cuts. It may come delayed, but the path, I think,
07:31 the direction is right, even if we don't exactly know the path. So I think, yes, it is time to be
07:37 loaded up on bonds at this point of time. Siva, how immediate do you think you will see any impact
07:45 of the RBI's decision? I mean, we've been talking about bond investments in a broader term for a
07:51 while now. Do you think you're going to see any specific sort of activity or any new strategy
07:58 basis this decision or this announcement yesterday? Does it really move the needle,
08:03 is essentially the question. It does move the needle because it's a large amount. It does move
08:07 the needle in terms of the fiscal situation. But like I said before, the point is to wait for the
08:13 final budget and then take a call on this rather than wait for now. I think this gives, as Dr.
08:18 Pandya also just mentioned, this gives a lot of flexibility to the government in terms of
08:22 planning its fiscal, especially the spending part, because they don't have to be as worried about
08:27 resourcing. And so that is what we'll be watching to see, whether the government uses this
08:33 extraordinary dividend to consolidate or whether they will use it to spend. And both are good
08:37 choices. The question from a bond market perspective is which one will the government
08:42 take? And so I think we'll have to wait until the final budget to take a final call on the direction.
08:51 But the path, I mean, like I said, the direction is more clear rather than the timing or the exact
08:57 path. So it's only a matter of time. Now, I will also say that once all those risks are resolved,
09:03 the rates, the yields won't be here. They will be significantly lower if everything
09:07 pans out in this way. So you cannot wait for these events to pass before getting invested.
09:11 So just to take that point further, if July is when things will become clearer on what
09:18 essentially the government does with this money. Does it consolidate its fiscal deficit? Does it
09:24 spend more? If it spends more, which is, I think, a possibility, you have a new term,
09:31 you want to front load all of your infra, capex, etc. How would you see that?
09:36 I think the priority of the government very clearly in terms of capex, in terms of building
09:43 infrastructure is very, very clear. And to the extent that this helps that process, the markets
09:49 will not be upset. Usually, when you look at the bond markets, they don't like it if it's so-called
09:56 poor quality spending, that is, higher spending in current expenditure. But if you have a higher
10:01 amount of spending in capital expenditure, I don't think the bond markets are going to be as
10:05 upset because it changes the potential GDP growth and therefore the fiscal metrics over a period of
10:11 time, because when you look at the key fiscal metrics such as debt to GDP ratio, if it increases
10:16 the trajectory of GDP, that expenditure is not seen as a negative. So I think it's very important
10:22 to see what path the government takes. I don't think bond markets will be upset either way. Of
10:27 course, consolidation will be seen very, very positively. But I think if the government goes
10:32 for higher capex, the bond markets will probably be quite okay with that.
10:36 Sivaiah, it's also Samina here and I want to get your perspective on a couple of things.
10:41 Since April, FBIs had almost taken a pause on front-loading ahead of India's inclusion
10:47 in the JP Morgan bond index in June. Do you feel like this move could now help FBIs resume that
10:53 front-loading, A, and B, while I completely take your point that duration is a good space to be in
10:58 right now and looks attractive, but remember, we've been saying this or talking about this for
11:03 the last two years now. Indian families, Indian chanais have gone out and invested in duration
11:10 over the last 8 to 12 months. Now, none of those portfolios are making any M2M gains.
11:15 One thing aside, if you hold to maturity, second, what I want to get from you is if there is a bump
11:19 up right now, would you recommend exiting these debt portfolios or do you think it's better to
11:24 wait it out for the next 8 to 12 months in anticipation maybe for rate cut as well coming
11:28 in from the RBI? Yeah, I think that's a very important point that in the recent past, we've
11:35 not really seen a big move and therefore, whoever have invested have largely made the equivalent of
11:40 the yield on the portfolios or whatever, rather than any major capital gains. But you look at
11:44 two years from where we started, two years ago, about this time, the 10-year yield was 760. So,
11:49 if you look at over the last two years, we've actually seen a decent-sized rally and I think
11:53 people don't appreciate that. That has happened during a period of rate hikes. So, what then
11:57 happens when rate cuts eventually start? So, I think do not look at near-term, last three months,
12:04 six months, eight months and then say that I should be getting returns at every three-month
12:08 period. It doesn't work like that. You have to have a medium-term holding period. And as I've
12:13 said in the last couple of years, when we had all the worries about geopolitics, when we have had
12:16 all the worries about rising rates, we've still seen yields drop. So, I think have a little bit of
12:22 slightly different perspective. I have a little bit of a different perspective on this. I think
12:26 we are in for rate cuts and therefore, we should make money. Now, having said that,
12:32 what are the risks? There are risks out there. We are seeing continued pressure on geopolitics.
12:36 We could see a resurgence of inflation if we have an external burst of growth pickup. So,
12:43 we should be aware that there are reasons for changing the portfolio stance, which are
12:47 not related to this particular news, but rather would be if we change our macro view. At this
12:52 point of time, I'm not seeing those risks fructify and therefore, I feel confident in
12:56 running longer duration.