Shailendra Jhingan, Head Treasury & Economic Research at ICICI Bank believes that the recently announced measures on corporate bonds marks a positive step, with the introduction of total return swaps a significant development for banks. Speaking with Christina Titus and Mahesh Nayak, Jhingan stated that the policy repo rate is likely to remain unchanged over the next 9–12 months. He expects the rupee to move towards 89 by March-end, while the 10-year yield is seen trading in a range-bound manner.
Excerpts:
Do you think we are at the end of the rate cut cycle?
I believe that we are at the bottom of the rate cycle, and I do not see a need for further rate cuts. There has only been a partial transmission of policy rate cuts in the money and bond markets even as the transmission has been strong in the loan market. Considering seasonality in the fourth quarter, a three-month CD (certificate of deposits) is typically about 100 bps over the repo rate, but right now the spread is closer to 200 bps. Beyond a point, efficacy of rate cuts also goes down as structural factors such as high small savings rates and shift in savings behaviour come in the way of transmission. Monetary policy has already done what it could and the results are beginning to show.
Growth is nearing 7%. Inflation is low now but is expected to rise to 4% next year, with risks emerging from rising commodity prices. Therefore, policy repo rate is likely to stay at the current level of 5.25% over the next 9-12 months. Beyond that, swap markets have already priced in two hikes in the next 1-2 years.
What is the biggest concern in the market now?
The biggest issue is demand-supply imbalance. Savings are shifting towards assets like equities, reducing flows into bonds market. Tax changes on mutual funds and insurance have slowed debt investments. Bank deposits are not growing at the pace at which credit is growing, leaving less investible surplus to invest with banks. Pension funds are allocating more into equity. Add higher state borrowings, and the demand-supply dynamics have worsened, widening term spreads.
Where do you see the yields going ahead? What are the cues that market will be taking from here on?
There will be challenges in the next year as well, but I expect demand-supply dynamics to improve somewhat. The central government’s gross borrowing is at Rs 17.2 lakh crore and states are expected to borrow Rs 13.5 lakh crore— so, total supply is around almost Rs 31 lakh crore. However, I expect the demand to pick up as curves have become steeper.
We also expect the RBI to purchase about Rs 4-5 lakh crore of bond in FY27 to manage system liquidity.
I expect 10-year yields staying range-bound till March, with limited upward pressure. Banking system has reached a point where their LCR ratios are at their lowest possible levels and banks will need to augment their G-sec holdings as their deposits grow. Therefore, I expect demand from banks to improve in the next year.
This cycle is unusual: typically, low policy rates correlate with falling LDRs (loan-deposit ratio). However in this cycle LDR ratios have risen with falling policy rates as there has been a shift in financial savings. To sustain credit growth at double digit levels, banks will need support in the form of LCR (liquidity coverage ratio) relaxation even as the RBI maintains sufficient liquidity in the system.
What is your outlook on currency?
In the near term, the US trade deal helps from a sentiment perspective. I am bullish in the near term. I expect the rupee around 89 ( against the US dollar) by March-end.
The rupee has underperformed in 2025. On an REER (real effective exchange rate) basis, the rupee is almost 5- 6% below the fair value, so there is scope for the rupee to rally in the near term. The medium term picture depends on how capital flows shape up.
Since the US trade deal announcement, FPIs have turned positive and inflows have resumed. FPI flows are a true barometer of sentiment and the flows turning positive is a welcome change.
Call rates are sharply below the repo. Why do you think the RBI has not announced Variable Rate Reverse Repo yet?
From mid-December to end-January, weighted average call rates stayed high. The RBI is probably neutralising that by keeping rates low for a while, thereby aiding transmission. High surplus liquidity leads to lower overnight rates helping transmission in the money markets.
There is a renewed push from the government and regulators to deepen the corporate bond market. How do you think the recently announced measures to help the market?
These are positive steps. TRS (total return swap) is a great development for banks. Suppose I have a slightly negative view on a credit for the next six months– I can write a TRS and shift that risk out. The entire return on that bond goes to another investor.
Moreover, TRS will increase the FPI interest because FPIs, especially the hedge funds, don’t buy bonds. They just want to express short term views and they don’t mind paying spreads. Overall, these measures will deepen the market and help in increasing the liquidity.
We saw some uptick in external commercial borrowing. Was it refinancing or real demand?
The RBI’s buy-sell swaps have lowered forward rates, boosting ECB appeal. It has now become attractive for NBFCs/corporates to access ECBs as the cost of borrowing is comparable to the cost of raising funds in the domestic market.
The activity in ECBs is likely to pick up as low forward rates are attractive. With expected US Fed cuts, ECB borrowing looks attractive up to three years.
