Informist, Thursday, May 2, 2024

--Axis Bk Gambhir: Talks of RBI rate cut before Sep-Oct premature
--CONTEXT: Axis Bk treasury head Neeraj Gambhir's comments in interview
--Axis Bank Gambhir: Don't expect RBI to cut rates in FY25
--Axis Bk Gambhir: Sub-7% yld on 10-yr gilt looks difficult in FY25
--Axis Bank Gambhir: See gilt yields rangebound in next few months
--Axis Bank Gambhir: Some volatility in Indian forex market is good
--Axis Bk Gambhir: Expect rupee depreciation to continue medium-term
--Axis Bank Gambhir: Rupee trading behaviour to remain rangebound
--Axis Bank Gambhir: Expect balanced liquidity on net basis in FY25
--Axis Bank Gambhir: See more banks in swaps post new investment norms
--Axis Bk Gambhir: Expect FY25 to be better for corp bonds than FY24
--Axis Bk Gambhir: Expect deposit, credit growth of 13-14% in FY25

By Nishat Anjum, Sourabh Kumar and Subhana Shaikh

MUMBAI – With India doing fairly well on growth and core inflation, the Monetary Policy Committee of the Reserve Bank of India is unlikely to cut interest rates in the current financial year, according to Neeraj Gambhir, group executive and head - treasury, markets and wholesale banking products of Axis Bank Ltd.

"Our own sense is that if the growth holds up well, as it is expected this year, and as RBI's growth forecast is also higher than most private sector participants' growth forecast, then the reason or the need for doing a rate cut this year seems suspect," Gambhir told Informist in an interview.

"Typically, for an emerging market central bank, to start a rate cutting cycle ahead of the US Federal Reserve is somewhat difficult. So, if the US Fed is going to defer cuts until say September or October, then I think that the chances of India doing a rate cut this year are also quite low," Gambhir said.

"So, I think any conversation of a rate cut in India, before September and October, is premature." According to him, the unemployment numbers in the US, the wage data, and a slower disinflation process make a good case for the US Federal Reserve to have one or maximum two rate cuts in 2024, starting from September.

On Wednesday, the US Federal Open Market Committee kept the federal funds target range unchanged at 5.25-5.50% for the sixth straight meeting. Fed Chair Jerome Powell said the US rate-setting panel's next move is unlikely to be a rate hike, but added that the Fed was prepared to keep the current target federal funds rate for as long as appropriate.

Fed fund futures traders are now pricing in a 56% chance of a rate cut by the Fed in September, according to the CME's FedWatch tool.

The treasury head of India's third-largest private bank expects the 10-year benchmark government bond to be range-bound market for the next few months.

"I feel that going below 7% looks a bit difficult given the expectations on the rate cycle. At the same time, I do not see a reason for yields to fly through on the higher side," he said.

Gambhir expects the depreciation in the rupee to continue in the medium-term.

"From a slightly medium-term perspective, I expect rupee depreciation to continue. Developed markets, particularly US inflation, have stayed higher than where it was expected to be, but it is still much lower than India's inflation. The geopolitical situation is becoming more volatile and if commodity prices, particularly oil prices were to go up significantly, there would be a negative impact on the rupee."

The following are edited excerpts from a wide-ranging interview of Gambhir that included subjects such as policy, the financial markets, and the banking sector:

Q. How do you see the interest rate trajectory in view of the global challenges including uncertain macro and geopolitical developments? Rate cuts in the US are being constantly pushed back. When do you foresee a rate cut in India?

A. Let's start with the Fed first. It's very clear that the inflation outcome in the US is different from what everybody was expecting at the start of the year. There seems to be a lesser pace of deflation. The unemployment numbers, the wage data, all of them are pointing towards what is now being called a 'no landing scenario' or a far better outcome on growth, employment numbers, and a slower disinflation process. There is also some probability that you could have reflation as well if there is a bigger commodity price shock.

Now the expectation is that the Fed may probably do one or at the max two rate cuts this calendar year and the likely timing of those could be September or afterwards. Typically, for an emerging market central bank, to start a rate cutting cycle ahead of the Fed is somewhat difficult. So, if the Fed is going to defer cuts until say September or October, then I think that the chances of India doing a rate cut this year are also quite low.

While we are not directly correlated with US rates, if you look at our own economic conditions, we are also doing fairly well on growth and core inflation, but the headline inflation number continues to be on the higher side. So, I think any conversation of a rate cut in India, therefore, before September and October is premature.

Our own sense is that if the growth holds up well, as it is expected this year, and as RBI's growth forecast is also higher than most private sector participants' growth forecast, then the reason or the need for doing a rate cut this year seems suspect. Our economists are not forecasting any rate cut this fiscal year.

Q. If there is no rate cut in this financial year, will we be seeing a sub-7% yield on the 10-year government bond?

A. Looks difficult at this point in time, because we are at the start of the financial year and there is a large borrowing program that has to be done. Even though we are expecting a good amount of FPI (foreign portfolio investors) flows to come starting from the second quarter of this year on account of index inclusion, the actual flow remains to be seen.

I feel that going below 7% looks a bit difficult, given the expectation on the rate cycle. At the same time, I do not see a reason for yields to fly through on the higher side. I expect a very range-bound bond market for the next few months.

Q. Before the beginning of the new financial year, the market was buzzing with this narrative of the yield curve steepening. Even though there has been some correction in the short-end, the anticipated bull steepening has not happened yet. Do you think that narrative does not hold true any more, or will we see that in the near term?

A. I think that depends upon what the market's expectation of rate cuts is eventually. If you expect rate cuts to happen, you will expect steepening to happen. I don't expect a bearish steepening to happen. The issue is when does the RBI start cutting rates, and what's the right time for them to do that? As that view has been pushed out, you have seen the curve stay flat rather than become steeper.

Q. What is your forecast for government borrowing for the next three years?

A. Slightly hard to take a three-year view given the high level of uncertainty, but there are few things that can be expected. Firstly, I expect the fiscal consolidation to continue. We are still at about 4.5% of GDP in terms of gross fiscal deficit of the Centre, and that's actually quite high compared to pre-COVID-19 levels. Once the elections are behind us, policymaking will once again likely start focusing on further fiscal consolidation.

Secondly, we have seen a good amount of financialisation of savings, which basically means higher flows towards long term investment vehicles, whether it is pension funds, NPS (National Pension System), retirement savings, etc. Insurance has become a dominant player in the government bond market largely through the bond FRA (Forward Rate Agreement) route, and I expect that trend to continue. This would mean a much better supply-demand equation over the next two to three years. This is conditional upon us having three normal years.

Q. Do you think that the recent record low fall in the Indian rupee with low volume is just a blip in the radar and the appreciation bias still exists? Has it impacted the currency trading revenue? Has anything changed in traders' hedging pattern since the rupee hit a record low?

A. I would say that some volatility in the market is good. Very low volatility breeds complacency such as corporates not wanting to hedge their exposures because they feel that the rupee is well within the range. Volatility is back to some extent, and it is not a hugely volatile period. The rupee is still very well managed within a range.

Even though the realised volatility in the market has not increased to that extent, I think the perception of volatility has increased. Firstly, we have seen a much stronger dollar recently, post the repricing of US rate cut expectation. Secondly, the geopolitical risks have materially increased, particularly after what we've seen in the last month in the Middle East.

Thirdly, the US elections are becoming a toss-up. The approval ratings or the prediction of betting markets around who's going to win has narrowed very significantly in recent weeks. Depending upon where that election goes, you could have a lot more uncertainty in the market. Even though the realised volatility may not be high, I think people have to think about how they want to hedge their exposures.

Q. Market participants are said to have been puzzled about the movement of the rupee? What is your view on rupee?

A. From a slightly medium-term perspective, I expect rupee depreciation to continue. Developed markets, particularly US inflation, have stayed higher than where it was expected to be, but it is still much lower than India's inflation.

The geopolitical situation is becoming more volatile and if commodity prices, particularly oil prices, were to go up significantly, there would be a negative impact on the rupee. So all in all, even though our balance of payments view is that we'll still be a BOP (balance of payments) surplus country in the current financial year, I do expect the rupee to be on a gentle depreciation path.

Q. Do you think the RBI will require to keep higher FX reserves in the wake of heightened volatility owing to index inclusions? How do you think Indian government bonds' inclusion in global bond indices such as JP Morgan and Bloomberg, will change for the Indian currency fundamentally?

A. You need to look at the inflows on the bond index inclusion in the context of the overall balance of payments. At the end of the day, RBI or any other central bank does not manage one component of the balance of payments. Our net FDI (foreign direct investment) flows have been a bit weak, and it may continue to stay weak next year as well.

To some extent, higher portfolio flows will partly offset some of the weakness in FDI flows. Also, please bear in mind that index inclusion will result in a large one-time flow. After that is done, in subsequent periods the flow will depend upon other factors such as inflows/outflows in these funds.

Overall, we still have a reasonably positive expectation on the balance of payments, and it will be a reasonably positive number next year. We expect the RBI to absorb this balance of payment surplus through its interventions. As a result of that, the absorption of the net flows will basically result in some liquidity injection in the system. I expect the rupee to stay fairly range-bound in terms of its trading behaviour, and depreciation bias to continue.

Q. Currently, both one- and two-year swaps are not seeing any rate cut, and like you said, you also don't expect a rate cut in this financial year, so, do you think there's a chance of RBI tightening liquidity conditions?

A. If we look at the core liquidity situation, it is in surplus. If we look at the banking system's liquidity, it keeps on shifting between surplus and deficit depending upon government spending patterns. So, the big driver at this point in time is the government spending pattern.

In the past three months, the Reserve Bank of India has become far more proactive in managing these swings between deficit and surplus, and making sure that they don't translate into a sustained tightness in the money market. The two key variables to watch out for are: the government spending pattern and the net absorption of these (bond index inclusion) dollars by the RBI.

My view on the full year is that we will have a balanced liquidity on a net basis, but, we could swing between surplus and deficit, depending upon government spending during the course of the year.

Q. The new investment guidelines for banks were implemented last month. How is the bank coping with these?

A. We have implemented them, and we are fully compliant, effective Apr 1. All our technology changes, system changes, process changes, whatever was required to be done is done. I have not seen any material change in the market behaviour as a result of the implementation of these guidelines yet.

Q. Do you believe that the banking sector is facing any challenges because of the new investment guidelines?

A. I don't think so. The main thing is that they have brought symmetry between the cash market and the derivative market accounting. Earlier, there was an asymmetry; cash positions used to be accounted for differently, derivatives used to be counted differently. That was one of the reasons why banks were not using derivatives, for example swaps, to hedge their books. Now, that has changed. I would expect to see wider participation from banks in the swap market.

Q. We have been talking about a pick-up in private capex for a while, but that has not happened at the pace that was expected. The government will eventually slow down its spending drive, sooner or later. From the activity in the bond market, is there any sign that the pace of private capex is increasing or is it business as usual? How do you see corporate bond issuances in coming months?

A. From a macro perspective, if you grow at 7% for three successive years, you will start hitting some limits in terms of the economy's ability to handle this kind of growth on a sustained basis, unless you start seeing new investments. The reflection of this is typically seen in the capacity utilisation levels, which have been running at about 75% or thereabouts for some time now. That has been the main reason to say we will see capital investments kicking in.

However, the issue that I see in any capex cycle is that if the uncertainty in the environment is quite high, you tend to see capex getting deferred because people are not very sure what happens next. If the capex cycle is partly driven by foreign investments, then that environment has to be good and conducive, which doesn't seem to be the case right now.

While some domestic consumption driven capex will continue, it may not be a big bang, large capex story. With this, it need not necessarily require large fundraising by companies. In general, I think there is a lot of small funding that happens. I would say that while the corporate sector's credit demand isn't very muted as it was 18–24 months ago, there has been a reasonable pickup.

Q. Corporate bond underwriting and distribution business is becoming highly competitive and is a low fee earner. What are your plans for your debt capital market business in this financial year?

A. The year has started well for us even though the first quarter of the year tends to be a little low on issuance activity. We have seen broad basing of the issuer base. More NBFCs (non-banking financial companies) are now active, as are more private sector companies. They may not be active on a consistent basis, but the number of non-financial corporates accessing the market, particularly in areas like infrastructure, REITs and InvITs for example, continues to increase.

Overall, I am hopeful that this year will turn out to be better than last year. One is consistent demand from the corporate sector which should continue. Second, the rate environment is likely to be stable. We are not expecting big volatility on both sides. Third, the financialisation of savings in the hands of non-bank institutions means better demand for corporate bonds. Fourthly, with the HTM (held-to-maturity) norms, hopefully we will see more bank participation.

All these factors augur well for the corporate bond market.

Q. At the current juncture, do you see more value in going through the market route or lending route?

A. We do see both sides continuing to perform well this year as well.

Q. Did your on-lending to NBFCs witness some slow down after the increase in risk weights by the RBI? Are you being more cautious in lending towards NBFCs? Do you have increased exposure towards higher rated NBFCs?

A. There has been some repricing, and as a result of that capital requirements have gone up and hence the increased capital requirements have to be priced in. I have seen this repricing happen to some extent in the bond market and the loan market as well. But has it resulted in a material slowdown of flows of funding to NBFCs either from the bond market or the loan market? The answer is probably no.

As far as our own exposure is concerned, we have guardrails within which we operate. We have always been focused on selective NBFCs which filter through our credit criteria.

Q. All banks talk about is the spurt in digitisation. Is it largely on the retail side or are you also seeing value in underwriting on the wholesale side?

A. We have been investing in our core banking infrastructure for almost three years now. We have been investing in several parts of this infrastructure and that has put us in a fairly good spot as far as our ability to deal with size and volumes are concerned.

You must have seen that Paytm moved, and the first switch happened to Axis Bank for their nodal account. The reason why that switch happened quickly was because we had capability to deal with that size, volume, and the infrastructure.

Q. After the RBI barred Kotak Mahindra Bank from onboarding new customers through its online channels and issuing new credit cards because of deficiencies and non-compliance in information technology management, do you see this as an industry-wide concern?

A. Hard to say. I think these are all very institution-specific situations. I would not like to generalise.

Q. Given deposit mobilisation has been becoming a challenge, what is your outlook for deposit growth and credit growth?

A. Around 13-14% and that's the number that our economist team has put out in terms of our forecast for deposit growth. Broadly somewhat better than last year. Credit growth is also a similar number. The wedge between deposit growth and credit growth cannot continue for long, so they need to converge.

Q. This is the first time that the government plans to issue green bonds in the first half of 2024-25, and chatter in the finance ministry is that greeniums could be better this time around. Given past experiences, do you think conditions have changed now?

A. Remains to be seen. So far, I think most of the investments in these green bonds come from the domestic banks. We also participate, but there is really no difference between the two, whether you buy the green bond or whether you buy the standard bond. They both have the same treatment.

There is no incremental benefit from sovereign green bonds. My guess is that if the government wants to see some greenium on this, we need to see some benefit for the banks, because banks are the largest holders currently and one of the ways this can be done is that you actually use some bit of this towards priority sector lending. This is just a suggestion. Unless and until we see something like that play out, a sustained greenium, I'm not sure how much you can expect.

End

US$1 = 83.4700 rupees

Edited by Deepshikha Bhardwaj

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