Bond market experts believe that the yields, which have stayed over 7% for the second session on Wednesday; might remain at elevated levels.
The yield on the 10-year benchmark bond closed above 7% for the second consecutive session on Wednesday at 7.017%; on Tuesday, the yield had closed at a 14-month high of 7.05%. Given a slim chance of the central government breaching the fiscal deficit target for 2017-18, bond market experts believe the yields might remain at elevated levels. One reason the markets expect the government to borrow more than planned amount, in the current year, is the Rs 20,000 crore potential loss of revenues following a sharp cut in GST rates for a host of items. DK Joshi, chief economist at CRISIL, believes the government will stick to the target of 3.2% since it has been fiscally conservative. “We had expected the yield to be at 6.7% this year but we are in the process of revising this upwards,”Joshi said. However, Joshi observed there had been no substantial rise in inflation, only a slight pick-up. The consumer price index (CPI) inflation for October came in at 3.58%, up 30 basis points over the 3.28% in September. Chief economic adviser (CEA) Arvind Subramanian on Wednesday said the GST Council’s decision last week to prune substantially the list of items under the highest rate bracket won’t affect the Centre’s fiscal position much. The rate cuts will also have a salutary impact on retail inflation, said Subramanian. “I haven’t done any calculations but some estimates suggest a reduction (in CPI inflation) of 20-40 basis points, and that sounds plausible,” the chief economic advisor told CNBC TV-18.
The government has so far borrowed Rs 4.46 lakh crore of the budgeted Rs 5.8 lakh crore for the fiscal year 2018 leaving close to Rs 1.34 lakh crore of borrowings over the next four-and-a-half months. Shashikant Rathi, head of treasury and markets at Axis Bank, said while a number of reasons had contributed to the rise in yields, if the governemnt reassured markets it would not breach the deficit, yields would stabilise. “The central bank might adopt a neutral stance,” Rathi said. While the central government may not borrow beyond the budgeted amount, state governments may do so especially those that have announced loan waivers. These are Uttar Pradesh, Punjab, Karnataka and Maharashtra. Almost Rs 70,000 crore of SDLs are likely to be auctioned between now and December. An ICRA report indicates that SDL issuances could be in the range of Rs 4.8-5 lakh crore in fiscal 2018.
Ananth Narayan, a money market, expert believes that worries regarding over-supply will continue to persist for some time. “Over the medium term though, the market will continue to worry about bond supply from OMO, state governments, and possible fiscal slippages. Foreign portfolio investors (FPI) open quota for debt is largely utilised. Global markets remain uncertain, and low fixed deposit rates have pushed up substantial flows into Indian capital markets. Given all this and RBI’s cautious stance, the current trend of yield curve steepening may continue,” Narayan points out. So far in 2017-18, the central bank has conducted OMO sales worth Rs 1 lakh crore, to suck out liquidity, including one Rs 10,000 crore OMO, that has been announced.
However, Indranil Sen Gupta, India economist at Bank of America Merrill Lynch points out there could even be a reversal in the OMO sales.”We continue to expect it to reverse OMO sales by OMO purchases/government buyback/maturity of MSS T-Bills,” Sen Gupta said. Rising crude prices and a higher consumer price index inflation has dampened all expectationss of a rate cut in December. As Vijay Sharma, executive vice-president for fixed income at PNB Gilts points out, the main risk in the short-run will be crude oil prices. “In case the prices drift down, we may have seen the intermediate top in the bond yields. The fiscal deficit anxiety could be the theme next month onwards,” Sharma said. As on Wednesday evening, Brent crude was trading at $61.50 per barrel.