How are you looking at the overall outlook in terms of the economic pain because that clearly has not abated. What is the need of the hour to help revive the economy?
We are seeing sequential improvement from the April lows. We will soon have the core infrastructure production number for August and could see a minus 5% to minus 7% contraction compared to minus 9.5% that we saw in July. There should be the same kind of number for industrial production as well for the month of August, coming down to probably minus 3% to minus 5% in September.
Over a period of time, there will be sequential improvement and we are projecting July-September GDP to contract about minus 9% compared to minus 24% that we got in April-June. So the worst seems to be over. The only thing is that sequential improvement could be slow and it will take probably mid 2021 before we can reach the pre Covid-19 levels or even after that.
We would expect the government to announce some fiscal stimulus measures now that the economy has started opening up. We are already in unlock four phase and therefore in the second half of the fiscal year starting from October, we would expect the government to announce fiscal stimulus worth 0.5% of GDP which for the time being should be okay together with RBI keeping rates on the lower side for a long time.
While the central government really has deferred the loan moratorium case to the 5th of October there have been hints of this holistic package, what exactly is it that you think they are working with and could potentially be announced?
They have already announced the onetime restructuring of loans and so the market will focus more on that. Sufficient time has been given, a two-year time period for restructuring the loans, within which you can have moratorium as well. Now we need to see how many companies are coming and asking for restructuring from the banks that will be evident in a few months’ time and it will indicate what kind of stress we have in the system.
That is not yet clear but this time RBI would also be focussing on giving the GDP growth forecast for the year and the inflation forecast for the different quarters going forward. The last forecast that we got from the RBI was in February 2020. It has been close to six months and we would expect some forecasts from RBI. It would be interesting to see what kind of growth contraction RBI is working with.
We have a growth forecast of minus 8% for FY21 and inflation averaging about 5.7% for the year. So RBI’s forecast will give the market an idea of the kind of risk band RBI and MPC will be working with which can inform the market going forward. What will also be interesting to know from RBI is when the next policy is announced or outside the policies, what is RBI’s thought process in buying government bonds because there will be a lot of supply of government bonds which will be hitting the market and today sometime the second half borrowing program would be announced,
Our expectation is that the second half borrowing would be about Rs 4.3 trillion in line with the Rs 12 trillion that has been announced so far. Then later at some point of time, there could be a risk of increasing that borrowing amount but not at this stage. So the question is who will be buying these bonds and whether RBI will show the intent in doing more open market purchases and that will help them support the bond yields at 6%. A lot of things are expected from RBI and the market is eagerly waiting for the announcement of the three external MPC members as well as the date of the next policy meeting.
Already we have perceived that given a borrowing number, the government is unlikely to increase its borrowing any further and may leave room for some hike at the end of the fiscal. We might see a spike in yields but is there any room to manoeuvre here?
At this stage, we are not expecting any outright announcement of increase in borrowings. The government has borrowed Rs 7.7 trillion INR out of the Rs 12 trillion in April to September and so Rs 4.3 trillion is left. If there is any borrowing above Rs 5 trillion, the market will take it negatively. But we are expecting the balance amount Rs 4.3 trillion to be announced and then maybe in December-January, when the government has a better sense of how much shortfall they will finally have on the revenue side or what is the outlook on fiscal deficit, when they are going to present the next budget on 1st February, there is a risk the market is pricing in.
In January to March, there could be a risk of increasing market borrowing if the government is not able to get enough revenues and the fiscal deficit goes up. So that risk is there but not at this stage in my view. We will see how it goes. We are working with a fiscal deficit estimate of 8% of GDP. That 8% of GDP includes a bit of stimulus that the government has already given and probably will give another 0.5% but that is it. So you will have 8% of GDP fiscal deficit from the centre and 5% from the states — a total 13% of GDP for India as a whole and that itself will push the debt GDP to close to 87% in FY21 from 72% last year.
The government does not have too much fiscal space and therefore they are a bit conservative about increasing market borrowings further because yields will have a natural tendency to move up if the borrowing numbers are high.
Second, RBI is not in a position to cut rates in the short term because inflation has moved up and the September number could be higher than the previous two months of 6.7% because onion, tomato, potato prices have gone up and we probably could get a 7% handle on inflation in September.
If RBI is not cutting interest rates and the supply of bonds are hitting the market, then the only expectation is that RBI will be buying a lot of bonds to help yields stabilise at around that 6% mark, which RBI is working with for the time being.