ICICI Securities Primary Dealership Ltd., one of India’s biggest bond houses, says it will struggle to repeat profit levels seen last year as debt-market volatility dwindles. The central bank is likely to keep benchmark interest rates unchanged, reducing the chances of a substantial move in yields and thus making it challenging for primary dealers to generate income, Shailendra Jhingan, managing director and chief executive at the Mumbai-based firm that underwrites local sovereign-bond auctions, said in an interview.
“A range-bound market is not where our kind of rate-driven businesses thrive,” Jhingan said. “You need a strong directional view on interest rates to thrive and it will be a challenge in a range-bound market.”
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ICICI Primary Dealership posted a net profit of 4.12 billion rupees ($64 million) in the 12 months through March, more than doubling that of the previous year, as bond yields tumbled amid an accommodative monetary policy stance. At the same time, Prime Minister Narendra Modi’s recall of certain banknotes, which spurred an influx of funds into the banking system, boosted demand for debt.
A gauge of the 30-day historical volatility for India’s benchmark 10-year bonds fell to as low as 8.5 percent this month, from a high of 19 percent in the year that ended March 31.
Primary dealers underwrite auctions of sovereign debt, helping the government complete its borrowing program, besides undertaking fee-based activities for private clients. There are seven entities engaged exclusively in the primary dealership business in India, while fourteen others are part of banks, according to information from the central bank’s website.
The Reserve Bank of India is likely to keep interest rates unchanged in the fiscal year that began April 1 as it seeks to achieve its target of 4 percent retail inflation in a calibrated and durable manner, Jhingan said.
“The RBI’s comfort will come from seeing core inflation moving toward 4 percent in a sustainable manner,” he said. “So in that sense, the bar for a rate cut is much higher than a rate hike.”
The annual inflation rate fell to a record-low 2.99 percent in April as food costs eased. Price gains will undershoot the RBI’s trajectory significantly in the April-September period, but will rise to average 4.6 percent to 4.7 percent in the second half of the fiscal year, Jhingan said.
Jhingan favors the five- to seven-year sector of the government bond curve as yields there have failed to match the decline in those of longer maturities. The yield on the newly issued 10-year note is likely to stay in a range of 6.5 percent to 7 percent, he said.
“Rates are not going to change,” Jhingan said. “It is very difficult to foresee bond yields coming down significantly. India’s macro fundamentals are stable, which kind of puts a cap on yields as well.”
ICICI Securities PD, a unit of private lender ICICI Bank Ltd., will focus on diversifying further into fee-based segments such as debt capital markets, though that will also be a challenge given the aggressive reduction by banks in their base lending rates, he said.