BENCHMARK YIELD MAY DIP TO 7%

The Reserve Bank of India, which conducted the auction, had set the cut-off yield at about 7.15 per cent

The first Government of India bond auction for 2018-19 sailed through comfortably and according to indications, investor appetite is likely to remain healthy. Bond yields, too, are expected to remain benign, and could slide close to 7 per cent in the near term. The first bond auction for the current financial year held on Friday saw strong participation from market players. The reissuance of 10-year paper (7.17 per cent for G-secs maturing in 2028), amounting to ~30 billion, received bids of over ~120 billion. ABHIJIT LELE writes

The first Government of India bond auction for 2018-19 sailed through on Friday, and indications are investor appetite is likely to remain healthy.

Bond yields are expected to remain benign, and could slide close to 7 per cent in the near term.

Market players participated strongly. The reissuance of 10-year paper (7.17 per cent for G-secs maturing in 2028), amounting to ~30 billion, received bids of over ~120 billion.

The Reserve Bank of India (RBI), which conducted the auction, had set the cut-off yield at about 7.15 per cent.

Lower market borrowings by the government in the first half of 2018-19 set the positive tone, bond dealers and economists said. The increase in the investment limit in bonds by foreign portfolio investors (FPIs) also aided sentiment.

Besides, the RBI’s decision to permit banks to spread provisions for markto-market (MTM) losses on investments incurred in the third and fourth quarters of 2017-18 over four quarters gave room to banks to participate in bond auctions. Its fallout could be a softening of yields to reach 7 per cent at least in the near term, they added.

The yield can touch 7 per cent on benchmark paper (10-year bond) especially after the increase in the bond investment limit for FPIs, said Harihar Krishnamoorthy, treasurer and head (global markets), FirstRand Bank.

Many developments in recent times would support a further drop in yields close to 7 per cent, added Ajay Manglunia, head, fixed income advisory, Edelweiss Financial Services.

Banks, especially public sector banks, would be back in the market, especially since they have received a breather in the form of spreading losses. Inflation pressure is expected to be subdued.

Yields traded with a tightening bias till early March, scaling a two-year peak of 7.81 per cent on March 5. However, yields softened sharply by around 45 basis points mainly due to two factors. First, the lower inflation print for February and the government’s decision not to frontload its borrowings in the first half of 2018-19.

According to Chalasani Venkat Nageswar, deputy managing director, global markets, State Bank of India, beside the lower market borrowing in April-September, the government’s decision to issue short-term bonds is a positive sign. “They have come up with a plan, which is suitable and acceptable to players.” Also, the increase in FPI investments limits will soften the yield.

The 10-year G-sec is likely to trade in the range of 77.3 per cent for the remaining part of the first quarter of 2018-19. The yield could rise to 7.3-7.6 per cent in the second quarter, as the outlook for the Government of India’s fiscal trends, domestic inflation and FPI appetite for G-sec becomes clearer.

There is, however, an issue of how long the softening of yields will last. The softening bias is likely to last only in the near term, said Soumyajit Niyogi, associate director, India Ratings and Research.

Bond yields could touch 7 per cent on some days. This trend (of falling yield) is not sustainable since there were risks of fiscal concerns in the second half of the financial year, especially in the runup to the general elections, he added.

There are also headwinds like rising interest rates in the US.

The yield could rise to 7.3-7.6 per cent in the second quarter