The Indian debt market is facing two problems presently: One is the liquidity issue and the other is solvency. Even good borrowers are having problems as the money is tight. So, what’s the outlook and will the liquidity issue ease shortly?
CNBC-TV18 spoke with Ananth Narayan, professor at SPJIMR and Suyash Choudhary, head – fixed income at IDFC Mutual Fund, about the debt markets.
“The core liquidity ex of government balance has actually turned positive now after a long time. We think just like what Governor Rajan did in 2016, the RBI needs to explicitly move to +1 percent NDTL liquidity stance, which would probably then get transmitted because the market would then work with the hypothesis that liquidity changes are not accidental but intentional,” said Choudhary.
Narayan said there are two parts to this problem. “Liquidity is a valid and strong tool to use to transmit rates better. Since 2011 the RBI has maintained that it will try and keep the liquidity in the permanent deficit that makes no sense. Actually, having liquidity surplus is a fantastic way of transmitting lower rates and rate cuts in accommodative policy and having a liquidity deficit in the banking system is a great way of transmitting tight monetary policy. So as an adjunct we need to have liquidity framework which is in sync with the monetary policy framework,” he said.
“At best liquidity and bringing rates lower can be palliative, it can be a pain killer but it is not the cure to many of the problems we have in the system today,” added Narayan.
According to Narayan, “The other issues that are causing this pain at the moment are one, trust deficit around NBFC – how can one solve that using liquidity or lower interest rates. Two, the fact that fiscal deficit is extremely high and therefore borrowing by the government both directly as well as through public sector enterprise is high, which is keeping interest rates high. Third, there is a pain in the power sector – how can interest rates be used to solve this problem.”
“So at best even if you do provide palliatives because the system is hurting, you have to focus on the real solutions as well. You have to make sure that the NBFC trust deficit is solved and it is not going to be an easy process,” said Narayan.