Mumbai: The jury is still out on assessing the impact of the budget on Indian equities. By contrast, the direction of bond yields should be much easier to call.
On Monday, the first workday since the budget, bonds should rally and drive yields down, with the markets rewarding North Block’s fiscal rectitude despite mounting political pressure to expand its balance-sheet and enhance spending, perhaps even beyond its means.
So, the benchmark yield may drop by about 10 basis points despite the Reserve Bank of India (RBI) likely keeping policy rates unchanged this Thursday. The rally in bonds may sustain a couple of weeks, extending the gains by another five basis points. This would help reduce overall market borrowing costs.
When bond yields dip, prices of the instruments rise.
“The overhang in the bond market is now gone as the budget did not spring any ugly surprises in terms of fiscal or borrowing numbers,” said Jayesh Mehta, India Country Treasurer at Bank of America. “Yields may fall up to 15 basis points in the next two weeks. Investors should get further clarity from the RBI policy, which in turn should add to more buying interest.”
The benchmark bond yield closed at 6.60 per cent last Friday. Bond and currency markets were shut Saturday although the equity markets traded on the Budget day.
"The lack of any extra market borrowing this year and a lower than expected gross borrowing for next year are positives that should provide support for government bonds," said B Prasanna, Group Head - Global Markets, Sales, Trading & Research, ICICI Bank.
This month, the benchmark yield rose 10 basis points on concerns of fiscal slippages and higher market borrowings. The government pegged its fiscal gap, or the excess of expenditures over revenues, at 3.8 per cent next fiscal year, short of 4 per cent estimated by the markets.
“Bond traders were earlier cautious,” said Ashhish Vaidya, managing director and head of treasury and markets at DBS Bank India. “But now, some buying interest could come back adding to the demand.”
Traders earlier estimated gross borrowings at Rs 8-8.20 lakh crore, compared with Rs 7.8 lakh crore announced in the budget.
The budget has unveiled such plans that overseas buyers could buy select sovereign bonds. At the same time, foreign portfolio investors now have more space to invest in corporate bonds, with the investment cap rising to 15 per cent of outstanding papers from 9 per cent.
The rupee, however, could be under a bit of pressure because of global risk aversion in the aftermath of the coronavirus epidemic. Some traders expect the rupee to remain a bit subdued toward the latter half of the year despite brightening prospects of overseas fund inflows.
“The rupee could lose more than one percent next two trading sessions amid asset sales by global investors,” R K Gurumurthy, head — treasury at Lakshmi Vilas Bank. “But, in the medium term, the rupee could regain sizeably amid expected foreign inflows.”
The rupee lost 0.46 per cent in January to close at 71.35 per dollar Friday. It is one of the worst performing emerging market currencies.
“Investor sentiment over the macro scenario would weigh on the rupee immediately after the currency market opens on Monday,” said Samir Lodha, managing director at QuantArt Market Solutions.
The weakness would persist next few days due to Budget disappointment, according to Anindya Banerjee, currency analyst at Kotak Securities.
Source: economictimes.indiatimes.com