by considerable fiscal slippage in FY12 and announcement of higher borrowing in the first half of the fiscal. But RBI’s OMO support, lower growth numbers, reform initiatives, and global risk aversions kept the benchmark yield around 8.2%. Easing liquidity conditions helped the shorter end of the yield curve.
Better outlook in 2013
Growth is expected to bottom out and improve next year as reform initiatives and better sentiments translate to higher activity levels. Inflation numbers have already come in below projected levels for the past two months. Next year, inflation is expected to come down further — the lowest in three years. RBI has indicated a shift in stance to support growth and, finally, rates amy move down. Fiscal deficit target is obviously very challenging to achieve, but it is encouraging to see that government is serious about cutting expenditure. If the fiscal deficit approximates 5.3%, market is well positioned to absorb any additional supply based on banks’ additional SLR demand, RBI’s OMOs, & demand from FIIs, MFs, pension and insurance funds. Further the government seems intent to remain on the path of fiscal consolidation even in FY14 despite that being an election year.
Going into 2013, the bond market will find support from falling inflation, moderate growth trends, manageable twin deficits and monetary easing measures. The demand-supply dynamics will remain favorable and RBI might cut repo rate by 50-75 basis points in next 3-6 months. Bond yields are expected to move down meaningfully. We expect the curve to bull steepen over the next 12 months, thus presenting investment opportunities across the yield curve.
The author is head of fixed income, Reliance Capital Asset Management