Now that debenture redemption reserve issues have been sorted out, corporate bond issuances are likely to pick up. Ananth Narayan, South Asia head for financial markets at Standard Chartered Bank, feels yields could be pushed up by 25 bps. Narayan tells Shashidhar KJ that while, in the next 2-3 months, yields may rise, they are likely to stabilise thereafter with demand coming in. Excerpts from an interview:
What is the expectation from the market on how bond yields will move in the coming months?
There are a few things that are supportive for bonds and there are a few things that are not. On the positive side, between September 2013 when Raghuram Rajan took over at the RBI helm and now, the rupee has been the best-performing currency across the globe. And with a 8.5% headline rate for government bonds for the five-year term, they are very attractive assets for foreigners. On the domestic front, given the slow credit offtake, there is a need for assets and paper. Therefore, we are seeing a natural demand for all sorts of bonds. Likewise, expectations of the CPI moderating and the RBI being done with its hiking cycle will also support bond prices.
On the flip side, while there is a lot of demand from FIIs, the limit for government bonds is coming to an end. Secondly, we need to see how the monsoon pans out and trajectory of the CPI is going to look like, which is keeping people on the tenterhooks. While in a base case we expect the CPI to come down to 6.5-7% in November and, then, go back up in the first quarter next year, there is a risk that is exacerbated by the monsoon.
The third is the situation in Iraq, which throws the spanner in the overall macro works. Oil could spike up to $120 and beyond and that could derail a lot of the expectations. Balancing these reasons, we can expect yields to remain stable-to-soft.
How do you see the rates moving up for corporate bonds, with AAA-rated 10-year paper trading at about 9.25%?
We need to watch how generic rates and credit spreads move. There is definitely a risk that generic rates could move up across the board. While we are hoping that policy steps taken by the government can counter even a poor monsoon and the inflationary effects of that, you also have to consider the Iraq situation, which could push up the prices of commodities.
On credit spreads of corporate bonds, bunched-up issuances may push yields up, but there should be also adequate demand for any additional issuances. A flurry of issuances could push it from 9.25% to 9.5%, but I think the risk is more towards a move of 9%, simply because of the latent demand.
Demand for Indian paper in the offshore markets is also up….
Generically, we have seen credit demand across the globe; it is not an India-specific phenomenon though India has done very well in terms of credit spreads coming down. At the beginning of the year, the 10-year US treasury was 3% and above and right now it?s at about 2.5% , against the expectations of every market participant. The new Basel-III regulations have ensured that banks can?t lend to the non-sovereign sectors in a big way, without incurring a lot of punitive capital charges.
There has been a lot of demand from the banking sector, which has brought down yields. Also, while tapering is in progress, other central banks have continued with easing. Moreover, regulation with respect to insurance companies has also changed, requiring them to buy issuances with longer durations. And, clearly, with the dollar-rupee stabilising since September last year, prospects for India as a whole have been more promising than 12 months ago.