No Amount Of Liquidity Can Create Risk Appetite, Says HSBC’s Hitendra Dave
Risk appetite is weak not just for lending to corporates but also for buying long term government debt.
In the face of an unprecedented crisis and open-ended risks, no amount of liquidity injected by the Reserve Bank of India can create risk appetite. That’s according to Hitendra Dave, head of global banking and markets at HSBC, who believes the uncertainty is keeping investors and lenders cautious.
“It is fairly evident that the central bank is 100 percent committed to doing their bit,” he said in a conversation with BloombergQuint. However, “we have seen that even when you can give funding at zero cost, no one will take a credit risk if they are not comfortable and that's one of the things we have to solve for,” he added.
While other countries have solved this problem through central bank purchases of a wider range of assets and government backed guarantees for loans, the difference lies in the starting point of India’s fiscal situation. Dave points out that India’s combined fiscal deficit was around 8-9 percent before the crisis hit, while for developed countries it was in the low single digits.
It is, therefore, unfair to compare their fiscal packages to ours, he said. “If our starting point was a much lower fiscal deficit, I’m sure the government could easily take on additional contingent liabilities in a structure or mechanism so that banks would be incentivised to lend to the middle of the pack. But from what I hear, they are thinking of addressing this in a manner that doesn't leave them exposed to open ended risks.”
When it comes to India, the size of stimulus might be smaller but has been well directed through the channels of MGNREGA and Jan Dhan accounts which keeps the bottom of the economic pyramid lubricated, he said.
On March 26, India’s central government announced a stimulus package worth Rs 1.7 lakh crore, aimed at the country’s poor and unorganised workers. A day later, the Reserve Bank of India announced a 75 basis point repo rate cut, a 100 basis point cut in the cash reserve ratio and targeted long term repo operations. On Friday, the central bank announced TLTRO 2.0 worth Rs 50,000 crore, at least half of which is to be invested in smaller non-bank financial companies.
The first TLTRO helps the top rung of corporates remain lubricated while the second will eventually help smaller businesses who borrow from NBFCs, Dave said, adding “if you can keep the top and bottom of the lubricated, it's the middle of the pyramid that we have to solve for.”
While some of these measures will help, the broader risk appetite remains weak. This is visible in the fact that banks parked close to Rs 7 lakh crore at the RBI’s reverse repo window on some days last week.
Risk appetite is weak not just for lending to corporates and investing in corporate debt but also for buying longer term government debt.
Despite the RBI maintaining an accommodative stance after cutting the benchmark rate to 4.4 percent and flooding the system with liquidity, the 10-year bond yield is trading 180 basis points above the overnight trade. Many believe this is because investors fear a mark-to-market risk by investing in longer duration bonds. This risk could fructify if the fiscal deficit expands significantly and government borrowings surge.
This phenomenon, Dave said, illustrates that very few people actually have any risk appetite. “The biggest mark-to-market losses happen when you buy bonds at a time when they are at extreme lows. Those memories haven't faded.”
So what is the way out?
On Friday, reports emerged that the Indian central bank had intervened in a primary government bond auction. It also bought shorter term treasury bills in the secondary market. This helped bring down bond yields on Monday.
Will it eventually come down to the RBI to monetise an expansion in the fiscal deficit?
India will have to be open to all ideas, Dave said, but believes that the entire package cannot be financed by the central bank. “I’m not sure a 100 percent package funded by the central bank is a good idea and it will potentially cause problems and at this juncture none of us know the true cost,” he said.
He instead suggested a mixture of central bank support but with a significant amount of the load being carried by the government through additional cess or tax on common activities still carried out by majority of Indians, for a pre-specified amount of time.
Commenting on the overseas funding market, Dave said that Indian corporates who had borrowed overseas will have recourse to local borrowings since the dollar funding markets have turned adverse. He, however, does not see a risk of large unhedged foreign currency exposures leading to losses against the backdrop of a weaker rupee. A larger number of corporates, prompted by their banks, are now hedging their exposures, Dave said.
Watch the full conversation here: