India needs huge sums of money for its National Infrastructure Pipeline, which is behind more valuable projects ₹100 trillion by 2024-25. But these take longer to operate and funding them is a challenge we still can’t handle. Banks end up for asset-liability imbalance as they end up. The Center is expected to unveil details of our National Bank for Financing Infrastructure and Development to be set up to raise funds for long-term pregnancy projects. Not only is it dependent on long-term loans, there may also be work to develop an active market for such paper. So far, we have not had one to talk to. Private bonds have a short maturity (and liquidity), our standard yield curve for government securities does not exceed 10 years, and, despite the best efforts of the central bank’s debt manager, our central bank, have been weakened by the post – Kovid issue for more than five years. Banks need to be more encouraged to buy them, as our yield curve periodically distorts to reduce its long-term interest rates and late last week, market bears were described as “bond vigilantes” by the Reserve Bank of India (RBI). Betting against its yield control policy on the logic that bond returns reflect the risk of inflation on their tanner.
There are so-called permanent bonds, but the pricing policy for these is a confusing picture. Confusion over additional tier-1 (AT-1) bonds issued by lenders to fill the capital cushion. Yes Bank 2020 had to face not only the default risk on the written investors of its AT-1 securities on these, but also the absurd practice of pricing their premium so that the issuers by the opening date can use their choice to call them for redemption, which they can never do. Therefore, on March 10, in the interest of investors, the Securities and Exchange Board of India (SEBI) restricted the disclosure of mutual funds to AT-1 bonds and proposed a 100-year maturity period for their valuation. However, it has been argued that when India accepts an insatiable appetite for long-term debt at moderate yields, the cost of raising the capital of banks (so that they rely on public funds) increases as the government devalues over time. In response, SEBI is asking for 10-year bonds to play the benchmark for permanent AT-1 paper.
Clearly, extending our debt market is not easy. The U.S. has had a strong market for long-term securities over the past four decades thanks to its tight control over inflation and its large insurance and pension funds, but there has been a bond revolt due to the dollar flood epidemic. India is so bad. Willie-Nilly, the emergence of a long-bond market here with uncertainty over the impact of our loose economic and monetary policies on the internal stability of the rupee. Expectations of inflation are daisy. However, the Center should plan to issue 30-year bonds, perhaps even a ‘spice’ type for foreign buyers. First, our commitment to the stability of domestic retail prices needs to gain greater credibility. To this end, the RBI’s simple inflation-targeted rule, adopted in 2016 and currently under review, will have to prove its effectiveness over the next few years. It is too early to expect the kind of success we need for the long-bond market to emerge. But let’s get a shot at it.