After bazooka and Swiss knife, here is what Navneet Munot expects from RBI

NEW DELHI: After two major announcements within a month by the Reserve Bank of India to keep the financial markets flushed with liquidity, Navneet Munot wants continued support to the banking system and a guidance on open market operations (OMOs).

The ED and CIO of SBI Mutual Fund, which manages Rs 3.5 lakh crore worth of assets, said the fiscal situation in India is relatively stressed at the moment.

“Even after the lockdown ceases, the RBI may have to continue extending its support to the banking system in the form of macro-prudential measures. 40 or more days of business inactivity may open a slew of challenges before the corporates and in turn the financial system,” Munot said.

Most businesses have suffered heavily as the lockdown to check the spread of Covid-19 has left them with zero cash flow. Corporates have announced salary cuts and expect hit on revenues. Many of them have also delayed vendor payments, invoking worries of defaults on their debt obligations.

The government is widely expected to overshoot its deficit target of 3.5 per cent for the current fiscal. The probability of this happening increases even more as multiple agencies have projected flat growth in GDP as the estimates factor in projected growth in GDP. Moreover, the borrowings by the government is also likely to spike, eclipsing budgeted gross market borrowing of Rs 7.8 lakh crore in FY21.

Munot stressed that RBI should give guidance on its open market operations. “With additional fiscal slippage being unavoidable, [government’s] deficit monetisation either directly or indirectly through large scale continued OMO purchases would have to be on the table, notwithstanding the pitfalls of such an approach,” he Munot said.

RBI has been using OMOs as a supplementary tool to bring yields lower and increase liquidity. There are calls by the market participants for RBI to announce a calendar for open market purchases of dated securities. Street was left wanting as RBI refrained from debt purchase in its latest address by governor Shaktikanta Das.

The nation’s benchmark 10-year bond dropped as much as 15 basis points ahead of Das’ speech. They gave up half of the decline as the most significant measure announced for bond markets was a 25 basis point cut in the reverse repurchase rate.

The monetary policy committee had cut policy rates by 75 basis points in its last meeting. However, analysts have observed that that has not translated in real rate cuts with the same speed. Lenders, who are still dealing with aftershocks of the collapse of YES Bank, also have been jittery on lending to NBFCs and corporates as they fear defaults.

“Stresses in economic activity and hence growth suggests that rates will have a softening bias. While the fundamentals of macro-economic (growth-inflation dynamics) guide towards a lower rate, credit challenges remain,” said Munot.

He said SBI MF continues to maintain a relatively higher duration in its fixed income portfolios through government bonds and high quality credits.

“Given the continued uncertainty around the evolution of the COVID-19 situation and resulting challenges in the equity market and overall economy in general, we continue to remain bottom-up in our stock picking,” he added.