Indian ten-year bond yields will remain range-bound as they face two-way action in the near-term, the DBS Group said, adding that government’s plan to repurchase bonds up Rs 300 billion was a move to prematurely redeem some stocks using surplus cash balances.
Yields on Tuesday touched a fresh one-year high of 7.06% intraday, before closing at 7.03%, up about 15 basis points since last week. The DBS group said that government’s plan to repurchase bonds signals discomfort with yields beyond 7% mark, suggesting yields are likely to oscillate in the 6.95-7.06% range in the near-term. The DBS group said that it expects the 10-year rates to remain unchanged in the medium term.
However, risks of fiscal slippage, inflation concerns, rates stance and recapitalisation bonds are likely to continue weighing on government bonds. “We still see 10-year yields re-visiting 7.2% in the coming months, before edging towards 7.5% thereafter,” the DBS group said in a note.
Concerns that the government might need to increase borrowings to finance an increase in the fiscal deficit, are also hurting sentiments. GST revenue collections in October slowed to Rs 83,300 crore from Rs 92,000 crore a month before after rates were lowered on a host of products/services. “We continue to see risks of a modestly higher fiscal target this year,” it said.
Country’s fiscal deficit for the first half of the current financial year 2017-18 at Rs 4.99 lakh crore has already hit 91.3% of the total budgeted for the entire year. The country’s fiscal deficit for the April-September period jumped from Rs 4.48 lakh crore in the corresponding period last year, and is just a little shy of Rs 5.46 lakh crore that the government has budgeted for the entire year.
The government aims to restrict the deficit to 3.2% of GDP in the current fiscal as against 3.5% in 2016-17. In absolute terms, 3.2% deficit for the current fiscal works out to nearly Rs 5.47 crore.