The Reserve Bank of India (RBI) is well equipped this time around (unlike 2013) to weather any global disruption, said Arun Srinivasan, Head of Fixed Income at ICICI Prudential Life Insurance Company. In an interview with Saikat Das, he said inflation has peaked in India for now, but will continue to weigh on market sentiment. Edited excerpts:


Has inflation peaked yet?

We have seen the spike in headline CPI (Consumer Price Index) inflation so far. But the inflation figures for the next few quarters will be above the RBI’s target range. The point of concern would be the persistence of underlying inflation.

Where are interest rates going after a 140 basis point hike in the RBI?

The target range for bond yields, of course, has changed with the recent decline in oil and other commodity prices and with the general rhetoric around the accelerating global recession. Inflationary concerns and government borrowing will continue to be front and center and weigh on market sentiment. We expect the benchmark 10-year to trade in the 7.35-7.55% range going forward.

What do you think is the terminal repo rate in this cycle?

As pointed out earlier, as far as India is concerned, inflation will be a more dominant factor than growth. And, therefore, we believe that the RBI has done the right thing by continuing to focus on inflation and announcing the policy measures to that effect. We expect the terminal repo rate to be 6% by the end of this fiscal year.

How is India positioned to weather a global headwind?

India is also positioned as an economy facing a global slowdown, if at all. We expect Indian bond yields to rise gradually as we go through the year. This will likely attract international investors to local debt securities with a relatively stable exchange rate in India. The extension of outflows of funds abroad is now experiencing a reversal trend.

Is a global recession good or bad for the Indian economy?

India as an economy is well positioned, both among global players and the emerging market space. While recent printouts of trade deficits and the CAD (current account deficit) have raised eyebrows on the currency front and potential outflows from FIIs (foreign institutional investors), we believe the RBI is equipped this time around. (unlike 2013) to navigate smoothly through any global disruptions.

Although the impact of inflation on rates may be less than previously forecast, how will government borrowing play out?

Governments (Center and States) have budgeted a borrowing figure for FY23 that is significantly higher than in previous pandemic years. The scale of borrowing will continue to weigh on bond yields. That said, long-term real money investors have also grown in size and have a natural demand for duration papers.

Therefore, how the government allocates borrowing between different maturities will affect the overall shape of the yield curve.

The additional credit-to-deposit ratio indicates that banks are unwinding G-Sec positions. How much of a spike could this cause?

Credit growth for banks has been fairly healthy, with loan growth in India hitting its highest level in three years and accelerating as economic activity gains momentum. Banks will therefore not be enthusiastic about being active buyers in the G-Secs market. In fact, we can potentially see banks reduce their holdings of G-Secs in the future. We could see a potential unwinding of SLR positions (statutory liquidity ratio or the share of deposits that banks keep in sovereign paper) by banks.

The RBI Governor had hinted at active operations in the money market. What are its options for fighting inflation?

RBI, in its current avatar, has been quite proactive and innovative when it comes to liquidity management. RBI has the usual tools at its disposal – CRR (cash reserve ratio), VRRR (variable reserve repo rate), OMO (open market operations) and OT (operation twists). Lately, RBI has been very active in the G-Sec secondary market in order to fine-tune the liquidity of the system. In short, when needed, RBI will use one of these tools to control liquidity.