A day after the GST Council meeting discussed the issue of compensation to states, ICICI Bank's B Prasanna said extra borrowing by states will be negative news for the market. Speaking to CNBC-TV18, Prasanna, Head, Global Markets Group at ICICI Bank further added that the market would like to see more measures like open market operations (OMOs) given the higher state borrowing.
“The two options look like a choice between the devil and the deep sea. You have in one option a borrowing of Rs 97,000 crore from the RBI and in the other option Rs 2,35,000 crore from the market. Either way, it looks like it could be negative news for the bond markets,” he said.
There is a risk of now extra borrowing by both the state and the Centre, Prasanna told CNBC-TV18.
“The positive momentum which was there in the market was kind of broken post the policy and also post the minutes. The recent announcement of the operation twist by the RBI is definitely a welcome development, but the market would like to see more such measures given the fact that there is a risk of now extra borrowing by both the state and the Centre,” he added.
Prasanna further added that the yields go up by 35-40 basis points in past few weeks and that the RBI has not done enough to contain volatility.
India is likely to end with a balance of payment surplus this year, he added.
“From a demand and supply perspective, the rupee has been witnessing appreciation pressure in the last one or two months and this is primarily because of two things. One is the fact that from a localised perspective, we have a huge balance of payment (BOP) surplus and we are likely to end the year with as much as $60 billion surplus this year,” he said.
Speaking about the global dollar weakness which is helping the rupee as well, Prasanna said, “But on the other hand, there is also a global dollar weakness with the relative growth in the US versus EM, is kind of dissipating and the control of infection by the US being relatively better than the second wave of infection which is coming off late. Then you also have the Fed policy which came yesterday which is pretty much a dovish central bank speech to say that they will go for an average inflation target. So, there is a general global dollar weakness which is happening and interestingly off late we have seen this dollar weakness also happening against EM currencies. In the initial part of this month it was not so much of EMs which were appreciating, it was only the DM currencies which were appreciating, but now in the last one week or so we have seen a whole lot of emerging market currencies appreciating and India is also doing pretty much the same,” he added.
Prasanna further added that excessive liquidity beyond a point is not good for the banking system.
“Excessive liquidity beyond a point is not really good for the banking system. But on the other hand, we really need RBI to intervene in the bond market to bring down yields because that is the only game in town which is left which is to help the government borrow and spend in order to drag the economy out of COVID which we are doing very appreciably,” he said.
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