Sucheta Dalal :Bond markets not taking talks of PSU divestment at face value
Sucheta Dalal

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Bond markets not taking talks of PSU divestment at face value  

November 10, 2009

Talks of the government’s burgeoning fiscal deficit have now reached a high pitch, giving vent to speculation on the direction of interest rates and bond yields. The government’s dose of fiscal and monetary stimulus measures, to revive an economy caught in the clutches of a global slowdown, have come somewhat at a cost. Now, with economic recovery slowly taking a more visible shape, the government has already given indications of withdrawing its supportive monetary stance in favour of a tighter, more aggressive interest rate regime.

In the midst of all this, the bond market has been waging a losing battle versus a euphoric equity market; it fears piling government borrowings and fears of monetary tightening. Bond markets have come under pressure because of the government’s borrowing habits. Yields on 10-year government securities (G-Secs) had almost touched 7.5%. The government’s talk of PSU divestment had come as a respite. However, there is still a degree of uncertainty regarding the government’s action in this regard. In an earlier interview with Moneylife, K V Kamath, chairman, ICICI Bank Ltd, had said, “The government is not articulating the wealth we have mainly in the form of public sector investments. Once the government hints that even a small part of this wealth can be monetised, nobody will then talk of deficit.”

Now that the government has articulated precisely that by sending equities higher, why are bond traders not at ease? Speaking exclusively to Moneylife, RVS Sridhar, senior vice president, treasury head, markets of Axis Bank, said, “In the first place, there was no target worth mentioning in the divestment space. A paltry Rs1,000 crore was budgeted and they have already achieved much more than that. This particular intention of selling these PSUs in smaller or larger tranches has been there for many years. I think today the government is coming out with a more comprehensive strategy, saying they will amass several tens of thousands of crores. I think they can deliver at least to some extent. So it could definitely lead to infusion of funds into the system, and thereby help to reduce the pressure on the bond market.” However, the bond market was being cautious on this front. He added, “Even in the case of 3G spectrum auction, it is not something which is taken seriously by the markets. We have seen that it has been postponed twice. Now hopefully it will happen within the financial year. Some of these issues are not entirely easy to follow through. Making a statement of intent to sell some shares of a PSU is one thing. Pulling it off in large numbers is another matter, because these are under public scrutiny. There is a process of arriving at a consensus and then coming to a decision. It is a long process. What the bond market does not have today is 100% confidence that this money will come within the financial year. Yes, on the equity side we have seen better numbers than what was estimated. On the 3G side we are feeling more confident that the money will come at least before March. But again, how much will come is still an uncertainty.”

Mr Sridhar said that the RBI’s stance in the past four-five months signalled a call to reality. He explained, “We have realised that so much of liquidity in the system may not prove beneficial to the asset markets, like real estate, commodities and equity. The surplus liquidity lying around may get into these markets and we might have a sort of asset price inflation. Central banks of economies who have escaped the worst effects of the aftermath, are now considering whether to continue with stimulus measures, monetary or fiscal, or whether to correct it, so that we don’t get such a situation. In that sense, clearly signals have been given to the market. Along with that, the fear that inflation is rising has become a reality. Concerns have been expressed that we should not lower our guard, but actually bring back our guard. RBI’s statements convey to the debt markets in no uncertain terms that they should be on their guard, and hence the first reaction would come from the G-Sec market. Central banks may not always act through measures; they can act through statements and indicators. So the impact on G-Sec yields can only be negative as we go along.”

According to him, yields are going up because one is not investing for the sake of selling tomorrow. “We are forced to hold these papers because these are part of statutory liquidity reserve (SLR) requirement. The government does not issue papers of short duration; it issues papers of 10, 15, 20 or 30-year duration. So when interest rates go up, we demand a price for the future as well. And as inflation expectations have gone up, RBI cannot stay away from hiking rates. If it hikes rates, what would happen to our cost of funding and G-Sec yields at that time? So markets make estimations. I think there is no chance of G-Sec yields falling significantly,”  added Mr Sridhar.
Sanket Dhanorkar  [email protected]

-- Sucheta Dalal