What could have led to this kind of a spike in the yields and what does it potentially indicate for the global markets as well as our own?
There are two different parts which are playing out. We are kind of aligned with US yields but there are two different things playing out very clearly. The US yields were too low and people are now pricing in very high inflation. In spite of the central bank saying that they will look through the inflation kind of a situation, people are pricing in a much higher inflation and therefore the long end of the curve is going up while the short end remains where it was. So, it is mainly the long end which gives jitters to the other assets because the interest rate also became an interesting asset play. At 150 and 180, it is where the technical breakout is.
It makes sense for long-term real money to start investing again in US treasuries. The market analysts were pricing in the yield curve and rate hikes in the US somewhere in 2024, but the OIs curve is pricing somewhere in the last quarter of 2022. Before that, there will be some tapering and that is what is happening in the US side. Even at 1.5%, we have a much wider differential between the US and India.
Coming back to India, our market is very clear that there is a very limited market for any borrowing which goes beyond 4.5%-5%. Unlike the US, we are not a global market right now. We have local players which constitute almost 95% of the market which is bank insurance, provident fund and mutual funds. We have to have Reserve Bank buying and of course the governor has given enough assurance that they bought it in 1920 and there is no reason why they would not buy at least Rs 3 lakh crore or more in 2021.
From that perspective, the comfort is there and that is where we have the yields where we have a little bit of aberration — 10, 20, 30 bps plus minus — keeps on happening because it is all about timing, it is all about people do get impacted little bit with the US yields. Also, there is rising inflation. But overall it is about when the Reserve Bank actually buys this Rs 3 lakh crore. That would kind some friction but eventually we will come off by May-June or so.
At what point would Reserve Bank of India get worried?
There are three parts. One is the liquidity. It is in surplus now. Whether we are 8 lakh surplus, 6 lakh surplus, 2 lakh plus minus does not really matter. What the market is really looking at is Reserve Bank buying. They have committed to buy and that is the reason we are not going to 7%. Last year, in 2020, the line on the sand was 6% . Now whether it will be 6% or 6.2% is what people are trying to figure out.
The central bank has enough tools and enough powers. If they decide 5.80%, it can happen. If they decide 6.30%, it will happen. Eventually, the central bank is more powerful than any of the market players. From that perspective, when they will actually step in, I don’t know. I do not really think they will. Eventually, maybe by May-June we will see stable pricing. There will be an alignment between the market and the Reserve Bank.
As far as inflation targeting is concerned I do not think anything is changing. The parliament passed 4% plus or minus, but somehow the narrative has changed. It is only after three consecutive times, it breaches 6.02%, this bank has to answer parliament why it happened. But otherwise from that perspective, we will see a clarification and emphasis that even at 5% inflation, if they need to cut the rates they can cut rates.