The Reserve Bank of India is expected to retain the benchmark repo rates at 6.5 per cent in its April 2024 review and policy stance of “withdrawal of accommodation” amidst robust growth combined with CPI continuing to be higher than the stated target of 4 per cent.

Stable economic activity, as can be evidenced from FY24E GDP growth of 7.6 per cent, gives RBI more room to focus on inflation for now. Inflation is expected to move lower from 5.4 per cent in FY24E to 4.5 per cent in FY25E, thus pushing the rate cut expectations to H2FY25.

Liquidity management seems spot on: Another pivotal factor is improved liquidity in the system in the last three months attributable to higher government spending, RBI infusing ₹1.16-lakh crore through three variable rate repo (VRR) auctions in March and RBI’s decision to take delivery of USD/INR buy-sell swap. This has helped reduce the overnight rates from a peak of 6.9 per cent to 6.55-6.7 per cent range. This bodes well for short term CP/CD rates, thus being a positive for corporates looking to borrow short term in form of CPs.

Cheer for bond markets: G-Sec gross borrowing of ₹7.5 trillion i.e. 53 per cent of the gross borrowing of ₹14.1 trillion against street expectations of 58-60 per cent — the lowest H1 borrowing since FY19 amidst expected large FPI inflows on back of inclusion in JP Morgan GBI-EM index — is expected to take Gsec yields lower.

This is expected to be very positive even for the good quality corporates looking to tap bond markets in the 1-5 year tenor bucket.

Comfortable external balance dynamics: CAD/GDP remained steady at 1.2 per cent in Q3FY24 with a widening goods trade deficit offset by strong services and remittances flows. Capital account balance improved with higher banking capital, FPI, and FDI flows. Rupee is expected to continue to remain strong, compared to other EM currencies given the comfortable external balance (FY25E CAD/GDP of 1.1 per cent), however upside risks can come from: (a) any repricing of FOMC’s rate cycle; (b) oil price increases owing to geopolitical tensions; (c) CNY devaluation and (d) BoJ actions.

Robust bank credit growth combined with record bond issuances: Incremental bank credit growth touched nearly ₹26.5 trillion in 9M FY24, much higher than ₹17.2 trillion expansion in 9MFY23. Going forward, bank credit is expected to moderate towards select sectors amidst regulatory measures i.e. increased risk weights on loans to consumer credit & NBFCs.

In addition, these measures can potentially add to the cost of funding from banks, thereby making capital markets an attractive borrowing avenue.

We expect increase in private corporate bond issuances as the well rated corporates will refinance some of their maturing loans from bond market. Sector wise, we expect growth in bond issuances from infrastructure, manufacturing & real estate sectors due to consolidation by strong sponsor groups in these sectors.

While policy imperative at the current juncture is expected to continue to focus on inflation target of 4 per cent on a durable basis, we may see a downward shift in the yield curve in the near term, and it may start to steepen as and when we move closer to the rate cuts.

However, the current scenario is expected to bode well for corporate bond yields, also simultaneously constraining banks’ ability to raise lending rates.

The writer is the President & Head Wholesale Banking, Kotak Mahindra Bank. Views expressed are personal