Budget Reactions: Axis Direct sees bond yields cool off, expects rate cut

Bond markets experienced some pressure today afternoon, after the Finance Minister announced the borrowing program for fiscal year 2014. In his Budget statement, P Chidambaram pegged FY14 gross market borrowing at Rs 6.29 lakh crore, which includes Rs 50,000 crore of FY15 borrowing.

“Expectations were around Rs 6 lakh crore, and the higher figure is what caused bond investors to go short on yields,” says Nilesh Shah of Axis Direct to CNBC-TV18. He further adds that yields will cool off once the initial reaction or disappointment is over.

Shah also believes the Reserve Bank of India could go in for an interest rate cut now that they have been given some breathing space when it comes to the fiscal deficit. The FM pegged fiscal deficit at 4.8% for FY14.

Below is an edited transcript of his interview. Also watch the accompanying video.

Q: What do you think the bond market has taken away from this Budget and what would you expect to see in terms of the next Reserve Bank of India (RBI) action?

A: The bond market is reacting to the increase in the borrowing program as compared to their expectation. Comments over the past few days indicated towards around Rs 6 lakh crore worth of borrowing program including the buyback. The numbers which have come is at about Rs 6,30,000 crore. So that Rs 30,000 increase is pushing bond investors to probably go short on the yields and that is why yields have backed up a little bit.

However, if we see the math, you have net borrowing program of about Rs 4,95,000 crore. This year RBI open market operations (OMOs) is expected to be between Rs 1,50,000 to Rs 1,60,000 crore. Obviously the RBI says that OMOs is a function of liquidity and not borrowing program, but I am assuming the same OMOs will continue because of the need for liquidity, the net borrowing will still be between Rs 320 to Rs 345 lakh crore which can be absorbed by the market.

Once this initial reaction or disappointment to the borrowing program is over, we will see yields cooling off. The RBI’s next section potentially could be towards rate cut because now they have been given a space in the fiscal deficit side at 4.8 percent for next year. So putting those two things together, I am reasonably sure that yields will come back.

Q: Just added to what the Budget did today and how sentiment is on India right now, do you think we have got a tough couple of months coming if we want to attract foreign institutional investor (FII) flows like we did at the start of January?

A: We have never seen a period where USD 4 billion kept coming in every month, that is right from November till February. Asking for the same in March is stretching our luck. So purely from that point of view the FII flows could slow down a little bit.

But the question that arises is with respect to the domestic investors. They are continuously providing supply to the global investors, but where are they going with their money? Certainly bank deposits are not growing at a fast pace, so is it going in to gold and real estate.

In the Budget there are some steps taken on improving Rajiv Gandhi Equity Savings Scheme, penetration of insurance sector, but net-net those are all long-term effects. There is nothing which is going to change immediately. My feeling is that the market probably will be surprised by the growth momentum which can be generated.

In the second half of current year, planned expenditure has been controlled significantly. Against Budget estimate of 22 percent we have spent 9 percent. In the next year that planned expenditure which has been withheld, curtailed and controlled will be spent and that could give some boost to the gross domestic product (GDP).

This is also pre-election year and normally pre-election year you see economic activity picking up. So, in the second half of next year, election spending could probably give a boost to the GDP and hence market could see a surprise on the GDP estimation. Hopefully that should give some sort of hook to the foreign investors as well as domestic investors to stay invested.