‘Structural overhaul needed to attract investors to bond market’

The hectic trading activity in the dealing room in the iconic Express Towers in South Mumbai usually keeps Jayesh Mehta, Managing Director & Country Treasurer, Global Markets Group at Bank of America, busy on most days.

As he sits to chat with Business Line , he steadfastly refuses to advise the Government on what it should do in the Budget even in his domain (financial markets). There is, however, one point he emphasises over and over again — the Government must somehow breathe life again into the real economy. That done, he believes the financial markets will take care of itself. Excerpts from the interview:

What can be done to revive and sustain investor interest in bond markets?

Currently, we are in a bull-run and there are a lot of inflows. Markets are liquid when bullish. The infrastructure for corporate and government bond markets is in place. The biggest determinant for the bond market is the real end-user.

In equity and bond markets, we do not have enough local players but we have kind of outsourced it to foreigners. If you remove the foreigners, then there is no liquidity. The point is that none of the financial products — equities, corporate or government bonds — is attractive to Indian investors.

One way to increase the liquidity is to throw the door open to foreigners to invest more as has been suggested by some people.

However, the RBI is doing the right thing by keeping a tab on foreign inflows. You cannot simply open up the equities or debt markets to foreigners. There are a lot of risks when it comes to global negatives. Especially with debt, we have to be really careful because banks will lose a lot of money (as they put 22.5 per cent of their NDTL in government bonds) if foreigners decide to pull back suddenly.

What is stopping Indian investors from investing in bond markets?

I have a theory called 8-9-10. If you look at the average yield of government bonds, it has been about 8 per cent over the past few years. Even yield on the AAA-rated corporate bonds is around 9 per cent and bank fixed deposits yield 9.5-10 per cent. So, tell me where will you put your money?

A 10 per cent return on an absolute basis is good, plus bank deposits are risk-free investments. There is no mark-to-market risk, there is enough liquidity and ease of access. Given so much flexibility, why will an investor break his deposit even for some structured products which give a return of 11-12 per cent?

So, if you want to attract investors to the bond market, there needs to be a structural overhaul but I don’t know how this can be done.

What impact do you think the end of quantitative easing (when US winds down fully) have on the bond markets?

The US tapering may lead to foreigners pulling back money in the short run. But if the Government does the right things on the real economy, money will still pour because this type of growth is not there in many countries across the globe.

Initially, investors will pull out but it will be more like a speed breaker. The Government delivering on much of its promises can quickly reverse the outflows.

One is fiscal deficit. If the Government overshoots the 4.1 per cent target by 20-30 basis points, the markets will consolidate after the initial negative reaction.

So, the Government can overshoot its borrowing target by ₹20,000-30,000 crore. It will, however, have to provide a credible action plan to bring down the deficit in the next few years.

Second is the problem of El-Nino impacting the monsoon and inflation raising its ugly head again. This fear is slightly overdone. The Government is working on the supply-side issue (by weeding out hoarders, etc). The belief in the stock market now is that if they are working on it they will deliver.

Oil, however, continues to be a major risk which can alter the calculations substantially if the price hits the $120 per barrel mark and remains there considerably longer. We believe that the government bond yield will drop to sub eight per cent in the next one year from 8.63 per cent now.

The trajectory of the rupee is positive and the RBI stacking up reserves is also a good thing.

Without the RBI’s intervention, the rupee might have appreciated beyond the 58-level mark given the inflows into the markets. We may see 58.5 per dollar in the next 15 days or one month.

How often does RBI intervene in the currency markets?

Generally, it intervenes on the days of high volatility. Right now, the RBI is buying dollars.

All said and done, the RBI needs to repay the $30 billion that it allowed banks to raise last year for stabilising the currency. The RBI’s job is to reduce volatility and protect public money.

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