With the Indian government unveiling its borrowing calendar for the full year, it has become clear that like every year, most of it would be front-loaded (that is, in the first half of the year).
Yesterday, finance secretary Rajiv Mehrishi said the government would borrow Rs 3.6 lakh crore in the first half out of its total yearly gross borrowing of about Rs 6 lakh crore. This would mean that every week, the government would issue paper of about Rs 15,000 crore.
But Amandeep Chopra, debt fund manager with UTI AMC, said that the bond market should digest the supply of fresh paper well.
In an interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy, Chopra conceded that FII inflows into the bond market this year may not be as supportive as last year – adding that RBI could further ease FII limits – but added that with the Fed sounding dovish at its recent meeting, prices could be range-bound.
The new government benchmark bond may be issued at 7.5-7.6 percent, the fund manager said – lower than current levels.
Below is the transcript of the interview on CNBC-TV18.
Latha: What is the sense you are getting of this Rs 15,000-17,000 crore that will hit the market every week from April 1. Therefore, from April 1 onwards do you think that you are going to see any upward movement in yields? How will you look at the yield range in the first quarter?
A: In terms of overall borrowing calendar it is inline with the market expectations and marginally below what we saw for the same period last year. So at Rs 3.6 trillion of gross supply it is about Rs 0.8 trillion less than what we saw first half of last financial year.
Second, you should look at the net supply; it is more or less inline with what we have seen in the last period as well. Therefore, no big surprising, only redeeming feature here seems to be that you will have new 10-year coming in, so that supply will determine the market mood and also the benchmark rates.
And the big speed breaker which was there for the market yields, the Fed policy, a very dovish stance from Federal Open Market Committee (FOMC) has given some respite to the market.
So while the supply in my view will get absorbed in the first half, its not significantly higher than what we have seen in the earlier periods but you could see yields moving up little bit over what we have seen in the Q4 March and that’s going to be driven more because of the new supply which comes in always does impact the yields initially.
Latha: Last year we were also bailed out because of this huge interest, foreign institutional investors (FIIs) interest, USD 26 billion was what we saw from FII funds. Will that continue this year now that Fed rate hike is there even if not in June at least in September?
A: That is a very interesting question, so you are right, I mean to large extent the supply last year was observed partly by the FIIs as well. That is one of the indicators that his year you may actually see some expansion in those limits. We already are hearing good amount of news flow from the markets that Reserve Bank of India (RBI) is looking very attractively to enhance those limits. It will be very opportune for RBI to increase those FIIs limits just to ensure that this excess supplies does get absorbed by the markets.
Even if you look at from Federal Open Market Committee (FOMC) perspective clearly the markets were expecting a much more bearish tone and outlook. However, the fact that they themselves have lowered their projections and have also indicated including what the Governor Raghuram Rajan’s spoke yesterday that he sees a much slower space of rate hikes from Fed. That will keep markets pretty much range bound.
Latha: What are your own projections in terms of inflation trajectory and rate cuts from the RBI? Do you see one more rate cut in the first half say by June, either April or June and therefore where are the yields?
A: From our perspective we are clearing looking at two things panning out over the coming quarter the first is there is a small possibility of a rate cut in the April policy itself. We continue to hold the belief that RBI would prefer to front-end some of the rate cuts in the coming financial year rather than wait anymore. Since the only impediment which was there earlier which was the FOMC statement and outlook clearly points towards a much more dovish stance from the Federal Reserve.
Secondly, like I mentioned earlier we do see some enhancement in the FIIs limits as well that is a technically not only in terms of timing but also ensuring that supply gets absorbed smoothly over the coming quarter from all participants including FIIs is also very well timed.
With these two events panning out I would look at the new 10-year ranging between 7.50-7.60 [percent] going ahead. I would expect some degree of rally in the yields as well.
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