Debt market outlook: RBI coming out in support of Banks, NBFC creates bullish future for bond yields, say experts

Debt market outlook: The Reserve Bank of India (RBI) providing liquidity support to the Indian PSU banks and private banks of Rs 80,000 crore that is expected to go up to Rs 2,00,000 crore by September and Repo Rate Government Bond yield gap coming down from 1.3 per cent to around 0.8 per cent have created a conducive environment for the debt market outlook in India. Experts are of the opinion that if the liquidity support rises from Rs 80,000 crore, the gap would further come down by 25 bps to 50 bps, which would make government lending more cheaper and would lead to a positive bias for the Indian debt market. They said liquidity support for banks is bound to trickle down to the NBFCs as well.

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Speaking on the debt market and RBI's pampering role in its buoyant outlook Suyash Chaudhary, Head – Fixed Income, IDFC AMC said, "The FY20 final Union budget provided an exceptional challenge to sound credible without deviating heavily from the interim budget targets. Given this, the finance minister delivered a remarkable balancing act. As with almost all budgets, revenue numbers will still get challenged especially given the ongoing sluggishness in the national economy. However, this is a creditworthy optimising given constraint and leaves the bond market reasonably satisfied. Also noteworthy is the fact that RBI Governor Shaktikanta Das, alongside 2 other Monetary Policy Committee (MPC) members, has seemingly been sympathetic towards some fiscal expansion and would likely have not considered this as a constraint for further easing. With the finance minister actually showing further consolidation, the trigger for further monetary easing becomes even stronger." 

Chaudhary added that RBI’s positive liquidity move (core system liquidity is already around Rs 80,000 crores positive and is likely to go towards Rs 2,00,000 crores by September post RBI dividend) and the global backdrop of sharply lower yields point to a continued bullish environment for quality interest rates.

Expecting a bullish outlook for the Indian debt market and the spread between the Repo Rates of the RBI and the rates being demanded by the government bonds Anindya Banerjee, Deputy Vice President — Currency and Derivatives at Kotak Securities said, "By providing Rs 80,000 crore liquidity support to the Indian banks, the Modi 2.0 Government has solved the first problem of spread between the RBI's Repo Rate and the interest rates being given by the Government Bonds, which was initially at around 1.3 per cent. Now, this gap has come down to 0.8 per cent, which is good for the Indian debt market." 

He said that there is a need to tackle the NBFC lending issue as they can't get funds through small savings as our private or PSU banks can. In such a scenario, the NBFCs are fully dependent on the banks for borrowing and banks lend them at higher rates than the interest rate they give on their small savings. Apart from that, our banks are not passing on the Repo Rate cut benefits to the NBFCs that have led to the continuance of the liquidity crisis even after the three successive Repo Rate cuts by the RBI Monetary Policy Committee (MPC). However, Banerjee said that by September the Modi 2.0 Government is going to raise the liquidity support up to Rs 2,00,000 crore, which may help contain the Repo-Government bond gap by an additional 25 bps to 50 bps in next quarter.