While risks to the macro environment are likely to rise in the coming months, Singapore-based DBS group’s economists have said that they reckon that a fair amount of bad news is already in the price of the Indian bonds. Indian bond markets continue to trade on a cautious note. The DBS group flagged concerns over FY18 fiscal targets, high oil prices, a firmer inflation trajectory, and rising US rates, saying that these are likely to dampen the mood in the domestic debt markets.
“With 10Y yields now within striking distance of the 7.5% key technical level, we reckon that rates could settle into the 7.5-8.0% trading range in the coming quarters. Meanwhile, there could be scope for dip buying in 2Y bonds after the 20bps yield surge in December, as the markets begin to factor in policy tightening moves by the Reserve Bank of India,” DBS said in a note.
Ten-year bond yields have risen to 7.4% this month, back to July 2016 highs and up by 90bps in 2017 compared to relatively flat movements in the region, India and China. In the immediate-term, the focus is on the new ten-year security at Friday’s auction, upcoming state governments’ borrowing schedule and bank recapitalization plans, the DBS group said.
The government plans to borrow an additional Rs 50,000 crore (0.3% of GDP) through dated securities this year, fuelling expectations of a miss in the deficit target. While these higher borrowings are being offset by a planned Rs 60,000 crore reduction in treasury bills, a heavy supply pipeline at a time when demand is subdued is likely to weigh on sentiment further.
The government on Thursday also sought parliamentary nod for additional Rs 80,000 crore bank recapitalisation bond for the recapitalisation of public sector banks (PSBs) which are sitting on a pile of Rs 9.8 lakh crore bad loans. Following the news, shares of almost all PSU banks rallied up to 10% in the afternoon trade.