India's bond market may face upward pressure ahead, says ICRA
By end of October 2017, 10-year G-Sec yields increased sharply to 6.88% from the low of 6.41% on July 24, 2017.
An upward pressure on will be seen further on the back of concerns regarding potential fiscal slippage at the Union Government level and a moderation in FII inflows into debt coupled with other factors.
In ICRA's view there is a low likelihood that potential fiscal stimulus or accounting for bank recapitalization bonds would trigger a meaningful fiscal slippage in FY2018.
Nevertheless, ICRA added that concerns regarding a slippage relative to the Government of India (GoI)’s fiscal deficit target of 3.2% of GDP for FY2018 continue to linger, particularly on account of lower-than-budgeted revenues given uncertainty related to buoyancy of indirect taxes post-GST, revenues from telecom and disinvestment flows, as well as the lower surplus transferred by the RBI.
Karthik Srinivasan, Group Head - Financial Sector Rating, ICRA, “Despite the planned increase in FII limits in corporate bonds and G-secs, the headroom for additional FII investment in debt securities is limited. Therefore, we expect FII debt inflows to be limited to ~$ 8-10 billion during H2 FY2018, lower than the inflows of $ 15.68 billion in H1 FY2018, which may exert some upward pressure on bond yields.”
Srinivasan added, “Moderation in FII inflows and lingering fiscal concerns will continue to pose upward pressure on bond yields. Nevertheless, the RBI is expected to curtail further OMOs through sale of G-secs. Benefitting from this, the 10-year G-sec yield is unlikely to harden beyond 7.0-7.1% by the end of FY2018, in our view.”
RBI conducted OMO (open market operation) sales of Rs 60,000 crore during Q2FY2018, which contributed toward a decline in the liquidity surplus and also pushed up bond yields. In October 2017, the RBI announced further OMOs of Rs 200 crore.
With the systemic liquidity surplus expected to moderate in H2 FY2018, open market operations (OMOs) through sales of Government securities (G-sec) are likely to be pared by the Reserve Bank of India (RBI), which would prevent the 10-year G-sec yields from rising above 7.0-7.1%.
By end of October 2017, 10-year G-Sec yields increased sharply to 6.88% from the low of 6.41% on July 24, 2017.
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