Have interest rates bottomed out in India?

The US 10-year bond yield has been climbing and the Indian 10-year is following suit

Published a month ago on Mar 13, 2021 2 minutes Read

Madan Sabnavis
Chief economist, CARE Ratings

The RBI could further lower rates, but it depends on two things–one is inflation and the other is government borrowing, which is going to be large. Also, with greater private demand for credit, interest rates could increase. However, there has been an assurance given by the Reserve Bank of India (RBI) that they are going to maintain an accommodative approach.

Globally, there is expectation that interest rates could move slightly upwards on account of recovery but, in India, because of the assurance of RBI, there is reason to believe that they may not rise. On chances of interest rates being lowered further, it will depend on inflation data. I would say there is still probably room for another 25 basis points cut; it may not be in April but probably in the first quarter of FY22.

The RBI is also making sure that they have lots of liquidity to lower yield of specific bonds. But the market is still skeptical because Rs.12 trillion will have to be borrowed in FY22. Borrowing of states will be in addition to that. This means the borrowing level will continue to be high even in FY22, therefore, yields are rising.

Tirthankar Patnaik
Chief economist, NSE

It will be difficult for RBI to cut interest rates any further, in the current scenario. The idea now is to go towards normalisation in the safest way possible, so that the current macro-economic setup is not destabilised. A balance has to be struck between supporting growth and tackling inflation. Commentary from the Monetary Policy Committee (MPC) has also reflected exactly this.

On the one hand, you have borrowing which went up by Rs.5 trillion last year, and on the other, the borrowing is going to be huge in FY22, despite being a non-COVID year. So, for the bond market, there is a significantly high borrowing number, second year in a row. This could elevate the interest rates, but it is for the government and the RBI to ensure that support for growth remains so that the fiscal push provided in the Budget becomes a reality. It is difficult for the RBI to envisage any further cuts, but the stance might remain accommodative. Though that is supportive for growth, inflation might crop up soon and will have to be kept in mind.

Going forward, the RBI has mentioned that current excessive liquidity condition will have to be normalised. As far as bonds are concerned, next fiscal too the supply will be high, and it is up to the RBI to try to keep yield-curve dynamics under control.