Bond vigilantes in India worry too much, must trust Modi administration, says IDBI banker

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October 30, 2019 9:53 AM

Ashok Gautam is betting that India will achieve its fiscal deficit target this year. That makes him something of a rare breed among investors in the nation’s bond market.

In contrast, the picture was completely different in 2018 when the rupee depreciated by over 13% between January and October, with foreign investors dumping both equities and bonds.Gautam, a banker for nearly thirty-five years, is counting on Prime Minister Narendra Modi’s administration’s past fiscal-track record.

Ashok Gautam is betting that India will achieve its fiscal deficit target this year. That makes him something of a rare breed among investors in the nation’s bond market. Gautam, a banker for nearly thirty-five years, is counting on Prime Minister Narendra Modi’s administration’s past fiscal-track record, which shows it can generate funds to plug revenue gaps. That, he said, would remove a major impediment to a debt rally, which could see the benchmark 10-year yield slip to near a three-year low as the Reserve Bank of India cuts rates further.

“The government has the room to generate resources,” Gautam, executive director and head of treasury at IDBI Bank Ltd., said in an interview. “They have done it in the past, and going forward, they will use other avenues to mop up any revenue shortfall.”

Fiscal concerns have come to the fore as the government announced a surprise $20 billion tax break for companies last month amid already sluggish growth in tax revenue. Hamstrung by fears of larger market borrowings to bridge the gap, the nation’s benchmark bonds posted their first back-to-back monthly loss in a year in September, with the 10-year yield climbing 33 basis points in the period.

An internal government assessment has estimated a gross tax revenue shortfall of 2 trillion rupees ($28.3 billion) compared with the budgeted figures, the Business Standard newspaper reported last week.

For its part, Modi’s administration is making efforts to raise funds via divestments, including stake sales in major state-run oil companies, an electrical firm and a national air carrier, among others.

The government stuck to its Oct.-March borrowing plan despite the reduction in corporate taxes and shelving of a planned maiden overseas bond sale. It raised 850 billion rupees selling stakes in public-sector firms in 2018-19, exceeding the divestment target of 800 billion rupees.

“Hopes are high that total sales could outdo the budgeted target of 1.05 trillion rupees, a rerun of FY18, and help to narrow the anticipated tax shortfall,” Eugene Leow, a fixed-income strategist at DBS Bank Ltd. in Singapore, wrote in a recent note.

Gautam, who joined IDBI Bank this year after stints at Axis Bank Ltd. and State Bank of India — the nation’s largest lender — said the government could seek extra dividends from public-sector firms and institutions.

Safer securities like government bonds made up about 664 billion rupees, or nearly 75% of IDBI’s total investment portfolio at the end of June. That’s after a high proportion of bad loans saw the central bank place curbs on its lending activities.

Gautam expects the 10-year yield to decline to 6.3% or lower by end-March, a decline of about 20 basis points from Tuesday’s close. The yield slid to a three-year low of 6.25% in July.

  • Here are some of his views on India’s credit market:
    • We don’t expect spread between top-rated five-year company debt and sovereign bonds to compress until March due to illiquidity and credit risk of corporate bonds
    • Expect Indian companies to continue raising funds through dollar bonds next year as borrowing costs offshore are attractive

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