Bond party set to cool in India as inflation, fiscal risks loom

Mumbai: The rush on India’s sovereign bonds declines as inflation accelerates and the risk of deteriorating public finances that clouds the prospect of higher-yielding securities from Asia.

10-year performance benchmark, an increase of 24 basis points in 2017, could further increase as the cost of living prevents the Reserve Bank of India has cut its interest rates, according to HSBC Holdings plc and emkay Global Financial Services Ltd., which will boost the supply of debt also threatens to lower bond prices after the performance has plunged 231 basis points over the past three years.

“The bond outlook is negative,” said Manish Wadhawan, director of interest rate operations at HSBC Holdings in Mumbai. Indeed, the “RBI is likely to be a pause until December,” and sells bonds through the open market at a time when liquidity in the banking system is declining, he said. “The likely widening of the budget deficit is also a huge risk.”

The 10-year yield ending on Friday at 6.76%, its highest since mid-May, after the central bank left rates unchanged last week raised its inflation expectations and reiterated the neutral policy . According to Emkay Global, the performance, which already surpasses the main Asian markets, will increase to 7% or more by the end of March.

RBI movement saw the falls fall in October after their first consecutive monthly losses since 2015. The massive sale in one of the most sought after investment destinations in the region was amplified by government comments contemplating measures to boost economic growth, which slowed to a three-year low in the last quarter.

This is when the budget deficit from April to August reached 96.1% of the full-year target. The administration does not exclude the sale of additional debts, said the secretary for economic affairs S.C. Garg.

Given that the fiscal slippage seems “done accomplished” and the RBI is a prolonged break, “the outlook for the bond market looks horrible,” said Prasanna Ananthasubramanian, chief economist at ICICI Securities Ltd. main dealer ranging from 6, 65 percent and 6.85 percent in the next two months.

While local investors are overseas pessimistic peers like Aberdeen Standard Investments and Pacific Investment Management Co., they see massive selling as a new reason to add to their bond positions which remains one of the largest economies of the world .

“India remains one of the current markets at a three to five year horizon,” said Adam McCabe, Aberdeen’s standard Asian fixed income manager. “It is still a reasonably high transport market. The regulation was motivated by concerns about fiscal slippage. This is not a major long-term concern. ”

Liquidity drain

However, restrictions on foreign investment in debt mean that foreigners – who have almost exhausted their limits on the purchase of bonds – have little influence on the market. Local government banks are the largest holders of sovereign debt.

the demand for bonds is also likely fresh due to the intervention of the central bank to absorb liquidity has been pumped into the banking system after the suspension of the government coin accident in November, HSBC Wadhawan. It sees performance in a range of 6.65% to 6.80% until December 31, above a previous estimate of 6.45% to 6.65% band.

“The best phase of the bond market may be behind us,” said Dhananjay Sinha, head of corporate research at Emkay Global in Mumbai. The sentiment becomes “increasingly bearish as the RBI is likely to appear less neutral,” he said. Bloomberg

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