The latest policies announced in Budget 2021 and the RBI have posed a few challenges to India's financial markets, its bond and the forex market. According to Anantha Nageswaran, Member of Economic Advisory Council to the Prime Minister (PMEAC), Budget 2021 under promises and hence can over deliver on the fiscal numbers. In conversation with CNBC-TV18, Nageswaran said that revenue numbers for the last quarter of 2021 and for 2021-22 will surprise on the higher side.

"What comforts me with respect to the bond yield and cost of government borrowing is the fact that there is plenty of slack in the way the government has drawn up the budget numbers. I think the revenue numbers, even for the last quarter of 2021 and for 2021-22, will surprise on the higher side. The expenditure has been budgeted conservatively for the first time I think in many years. We have a Budget that under promises and therefore has a potential of over delivering on the fiscal deficit numbers," he added.

He stressed that the scope for a positive surprise on the fiscal is putting a cap on bond yields. "Despite the bond market being taken aback by the headline number and the market borrowing requirement for 2021-22, I think eventually the scope for a positive surprise on the deficit is much higher than the scope for a negative surprise. I think that should put a cap on bond yields," he explained.

Nageswaran said that 6.3% on the 10-year benchmark bond yield would be prudent. However, he said that rising yields could puncture the on-going equity market rally.

"The truth is, nobody knows what the real trigger is for any stock market crash to happen and they are poised for a crash. They have completely broken the financial markets; the prices don’t reflect anything closely related to fundamentals, economic or corporate. So, yes, rising yields can be a potential trigger. The point is that it has to be more sustained, it has to cross some threshold levels. It is being watched, but at the moment it is still not in the danger zone," he said.

Lastly, Nageswaran highlighted that digital currencies threaten the banking system. "Digital currency definitely threatens the banking system. It completely disintermediates them. At the same time, digital currency while advantage of crypto is its anonymity, the disadvantage of a digital currency is its facilitating surveillance by the state. So, in that sense, the longer it takes for the RBI to issue a digital currency, the better it is for the citizens," he said.

To know more, watch the video.

(Edited by : Jerome Anthony)