5.7% growth forecast for FY21 looks reasonable: B Prasanna, ICICI Bank

B Prassana
India is not directly linked to China in terms of value chain, trade chain or the number of tourist visits. We have still not downgraded the economic outlook from that perspective.
With the way the economic growth continues to fluctuate at lower levels, what impact do you see on bond yields? What is your outlook on GDP growth?

We pencilled in a growth of 5 per cent for FY20, followed by a mild revival in FY21 at 5.7 per cent. While we have seen green shoots appearing in the economy with some of the high frequency indicators were better in December and January, they are largely lag indicators.

This is because they did not include the full impact of the Chinese virus outbreak. The sentiment indicators would now be looked at closely. India is not directly linked to China in terms of value chain, trade chain or the number of tourist visits. We have still not downgraded the economic outlook from that perspective. We still have calling for a 5.7 per cent growth for India in FY21.

Are you undermining the importance of coronavirus and what that could do to the global economy and, in turn, to India? We have not heard anything from government officials?

No, I am not. What I am saying is that we need further data before we really start downgrading the economic forecast. We do have put out a 5.7 per cent, which we feel is a very reasonable number for the next year.

All we are saying is that there could be a downside risk for want of a data. Once the data comes in, and once we figure out that the value chains are getting impacted, we will revise our call. One should also realise that there are lot of industries which could possibly try to spin the story around in a positive manner.

The demand, which was earlier going to some other countries, could potentially be taken by domestic industries. Net-net, the impact is still not clear. From services perspective, we are not greatly integrated with Chinese travellers. Even as India is in a region, which is terribly exposed to the new virus, its relative dealing is not going to be as worse impacted as the rest in the region.

I am not necessarily saying that it is going to be positive. But the negative impact is still not very clear. We would wait-and-watch for further data, before we take a call.

The 10-year bond yield is at multi-month low, given the RBI data suggesting a fall in credit growth at private banks to 12 per cent and for PSU banks to 4-5 per cent. As liquidity is back in the system. what scenario are we looking at – from liquidity deficiency to surplus liquidity and the demand is not making a comeback?

A lot of things have gone in favour of the bond market including the Budget proposal to open the bond market to global investors. From a capital perspective, you are going to expect more capital inflows coming into bonds. It is in reference to the index inclusion, and the fact that the government is planning to make bonds part of the ICSD framework that makes them eligible for trading by non-resident investors, and not just foreign portfolio investors.

Also the monetary policy was a master stroke in terms of the liquidity it gave in the form of the LTRO operations. Before the monetary policy itself, the RBI had also started the Operation Twist, where they were actually buying the long-end. So, the RBI was buying the long-end and selling the short-end. The LTRO came in and address the fact that the short-term yields could have potentially gone up. so Net-net, it is a very positive framework for bonds, purely from a demand-supply perspective. The RBI is clear in its attempt to make the easing happen through non-repo rate measures.

The fact remains that there seems to be a little scope for RBI to cut rate, given the inflation will possibly come down only in December or March quarter makes that a high possibility of a cut only happening in somewhere around June or August policy. From that perspective, the demand and supply for bonds are positive. That is a reason you have seen yields coming down post policy.

Can we anticipate anything else from the RBI in terms of ammunition? The central banks globally have been pumping liquidity to counter slowing growth. Where does India really stand in the overall context? Can we anticipate any higher investment in the economy?

The central bank has adopted a couple of measures, which have so far not been adopted by RBI at least. There are things like LTRO and Operation Twist, which have been actually ideas borrowed from the West. What liquidity can do is to bring yields lower because of the borrowing programme. For example, if suppose yields were to go up for the next year’s borrowing programme, the RBI’s operations will ensure that it actually keep a lid on yields going up.

From that perspective, it will be an easy environment for the bond market perspective and not too negative. What it does to the investment needs of the economy is you only have to assume that the flush of liquidity will make the cost of capital lower. The enabling environment will make corporates invest a little bit more.

The government is betting on an investment-led revival and it has done everything possible to take the enabling environment positive. There are degrees of freedom. The direct pump-priming of the economy through fiscal measures was not available for the government and the government took a very responsible call that they would not go through that route. Hence, it is the enabling environment a little bit more positive. In this context, it would also be interesting to note that once the virus effect fades, the revival in the global economy, especially in the Chinese economy, could be V-shaped. There will be a lot of fiscal spending that the Chinese government would put into the country.

Can you share your outlook on term spreads, given that we are seeing a benefit on the short-end yield curve, but the long-end still is facing some challenges from the government borrowing?

What really happens is that the spread of the 10-year bond yield over the repo rate has been pretty much on the higher side, considering that we are on easy monetary policy environment. What the RBI has done clearly is to target that term spreads because if they can really get the 5-year and 10-year bond yields come down, especially the 5-year bond yield, that will have a greater impact on the corporate bond spreads. The corporate yields coming down will benefit the corporates and, hence, the real economy.

The RBI has gone ahead, especially with the LTRO to bring down the short-term yields. We do expect it to keep coming down. It is already down by around 25 basis points post policy and we expect it to come down a little bit more.

The 10-year is a little bit trickier because as the short-end yield comes down, it will have a natural effect of bringing down the yields on the 10 year. On the other hand, it also has the negative effect from higher borrowing programme in the 10 year, which will start in April.

These are two opposing factors. But to prevent the uptick in yields on the 10-year paper, the RBI has also another weapon up its sleeve, which is the Operation Twist. It really depends upon when the RBI is going to come out with that measure and the market knows that they cannot really go short too much on the 10 year because any point in time, if operation Twist comes in. it is would be possible for 10-year yields to come down. I do expect the term spreads from the 10 year to the repo rate to actually be in range of 125 bps to 150 bps, which is really like saying that the yield will be in a range of 6.30 to 6.60 range till around April.