Benchmark securities erased almost all their gains by Friday as the focus returned to concern that rising oil prices will boost inflation and the government will need to sell more bonds to finance its budget deficit.
The feel-good factor only lasted a day. India’s bonds surged last Monday, with 10-year yields dropping the most in a year, after the central bank scrapped a planned sale of open-market operation bonds, fueling speculation it would end one of the sources of debt supply for the fiscal year. The bears didn’t take long to reappear. Benchmark securities erased almost all their gains by Friday as the focus returned to concern that rising oil prices will boost inflation and the government will need to sell more bonds to finance its budget deficit. “The market reaction clearly suggests that the OMO cancellation impact was shortlived and risk appetite has been impacted more than the market was assuming initially,” said Suyash Choudhary, head of fixed income at IDFC Asset Management Co., which has the equivalent of $10 billion. “The already high supply of government and state bonds, worries over fiscal slippage and hawkish RBI inflation commentary has weighed on sentiment.”
India’s 10-year bond yield has climbed about 60 basis points from its low in July as higher oil prices saw annual inflation accelerate to the fastest in seven months in October. That damped speculation the Reserve Bank of India will be able to lower interest rates any time soon. The benchmark yield closed at 7 percent on Friday. IndusInd Bank Ltd. projects the yield will climb to 7.10 percent by the end of December, while Emkay Global Financial Services Ltd. predicts it may rise as high as 7.50 to 7.80 percent in the next six-to-12 months. S&P Global Ratings reaffirmed India’s sovereign rating on Friday and maintained a stable outlook, in contrast with Moody’s Investor Service that upgraded the country on Nov. 17.
Other comments from traders and strategists on the outlook for Indian bonds include:
IDFC Asset ( Suyash Choudhary, head of fixed income in Mumbai)
“One hopes that OMOs are gone for good for the foreseeable future, given that if you see the rest of the year, states have to borrow potentially another 2.5 trillion rupees and central government has a reasonable borrowing ahead” “Given that circumstance, if OMOs were at bay for rest of the financial year that would be a reasonable outcome for the bond market” Further OMO sales will be guided by the RBI’s forwards, “then one can argue that there could be more”
Emkay Global Financial Services ( Dhananjay Sinha, head of institutional research in Mumbai)
“With the 10-year yield rising close to 7%, an OMO sale would have further accentuated concern both at the short and long end of the curve. Clearly, this action signifies that the liquidity condition is closer to neutrality following an abnormal bulge in surplus money in the aftermath of demonetization shock and GST-related disruptions” “Reversal in some of the indicators such as the revival in credit growth, decline in systemic excess liquidity, the still leveraged banking system, increased supply of government debt and revival in inflationary pressures” will weigh on bonds
Edelweiss Asset Management Ltd. ( Dhawal Dalal, chief investment officer for debt in Mumbai)
“Given the declining level of surplus liquidity in the banking system and fragile sentiment, bond-market participants expect the RBI to remain on the sidelines for a while as far as OMO bond sales are concerned” “The fair value of the benchmark 10-year government bond yield is between 6.75 percent and 7 percent in our opinion. We expect the yield to remain range-bound in the near-term”