India Gilts Review: Fall as fisc worries override rate cut hope

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India Gilts Review: Fall as fisc worries override rate cut hope

Monday, Dec 2

 

By Vaibhav Chakraborty

 

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NEW DELHI – Despite expectation of an imminent rate cut by the Reserve Bank of India, government bonds fell today as market participants turned increasingly jittery about the Centre’s fiscal position, given the deepening slowdown in economic growth, dealers said.

 

Today, the 10-year benchmark 6.45%, 2029 bond closed at 99.71 rupees or 6.49% yield as against 99.88 rupees or 6.47% yield on Friday. The bond price had touched a low of 99.65 rupees or 6.50% yield. 

 

India’s economic growth has been slowing over the past few months, with data released after market hours on Friday showing that GDP grew at a 26-quarter low of 4.5% in Jul-Sep.

 

The downturn in economic growth has taken a severe toll on the Centre’s revenue collections, increasing the odds of a fiscal slippage. The Centre’s tax mop-up rose a measly 1.5% on year in the first six months of the financial year as against the Budget projection of 18.3%.

 

With the Centre having slashed corporate tax rates in to give a fillip to growth, it seems a foregone conclusion that the fiscal deficit target of 3.3% of GDP is set to be overshot, perhaps by a large margin. Data released by Controller General of Accounts on Friday showed the Centre’s fiscal deficit at 7.204 trln rupees in the first seven months of 2019-20 (Apr-Mar), which accounts for 102.4% of the Budget target. 

 

Given that a fiscal slippage carries with it the threat of additional market borrowing,  chose to look past the prospect of more rate cuts by the RBI and instead reduced exposure on their bond portfolios. 

 

The , which has lowered the repo rate by 135 basis points since February, is widely expected to announce another cut in interest rates at its next monetary policy statement on Thursday, given the dismal state of economic growth.

 

A fall in interest rates notwithstanding, spreads between bond yields and the RBI’s repo rate are seen widening on account of the fiscal concerns, dealers said. 

 

At 6.49%, yield on the 10-year benchmark 6.45%, 2029 bond is a whopping 134 basis points above the RBI’s current repo rate of 5.15%, a far wider gap than usually exists in a scenario where interest rates are seen heading lower. Typically, the spread between the yield on a fairly-priced 10-year bond and the repo rate is less than 50 bps when the central bank is poised to cut interest rates.    

  

The elevated spread between bond yields and the repo rate reflect the market’s unease about the government’s finances and the dreaded prospect of an increase in market borrowing, dealers said. The government has already announced a record-high gross borrowing of 7.10 trln rupees for the current financial year and any extra bond sales would be difficult to absorb.

 

What has made it particularly precarious to bet on bonds now is that the government takes stock of its finances towards the end of the calendar year when it has a clearer idea of how its revenue collections are shaping up. Over the last couple of years, government borrowing has been revised either in December or when the is presented in February.

 

“We do not see yield on the 10-year bond sustaining below 6.40% even after another rate cut,” a dealer with a primary dealership said.”The steepness in the bond yield curve is the most in at least a decade and in fact the sort of spreads we are seeing right now are in line with a rate hike cycle. This is purely because of demand-supply considerations. do not have real appetite for bonds and there are no fresh investors,” he said.

 

Moreover, several bond traders were of the view that while the RBI is seen cutting interest rates, it may not have much ammunition left after the substantial quantum of rate cuts delivered so far this year. The 135 basis points worth of rate cuts so far in 2019 is the most in a single year since 2009. 

 

“There are some people in the market who are now expecting only a 15-basis-point rate cut, because inflation has gone up and while growth has fallen, it is not close to the 4.00% that a lot of people were expecting,” a dealer with a private bank said. “Clearly, the best of the rate cut cycle is behind us but there is no respite on fiscal deficit and government borrowing,” he said.   

 

Market-wide turnover was at 268.80 bln rupees, against 306.95 bln rupees on Friday, according to the RBI’s Negotiated Dealing System – Order Matching

 

On Tuesday, government bond prices may open steady as traders are likely to remain on the sidelines ahead of the RBI’s monetary policy statement on Thursday.  

  

While the central bank is seen cutting interest rates, intensifying concerns about the Centre’s fiscal position may keep appetite for bonds in check. 

 

Market participants fear the government may slip on its fiscal deficit target of 3.3% of GDP as a result of weak revenue collections and corporate tax rate cuts made this year. 

 

Later in the day, bonds could take cues from the result of a state bond auction, where 14 states have offered to raise 139.09 bln rupees.

 

Yield on the 10-year benchmark 6.45%, 2029 paper is seen in a band of 6.47-6.52% as against 6.49% at close today.

 

  TODAY FRIDAY
Price Yield Price Yield

7.32%, 2024

104.0200

6.2038%

104.0650 6.1922%

7.27%, 2026

104.0300

6.4830%

104.1650 6.4577%
7.26%, 2029 104.0300 6.6614% 104.1800 6.6399%
6.45%, 2029 99.7100 6.4888% 99.8775 6.4655%
7.57%, 2033 104.7300 7.0224% 104.8300 7.0112%

India Gilts: Down more as US ylds rise; worries over govt fisc weigh

 

  1515 IST   PRICE HIGH   PRICE LOW        OPEN     PREVIOUS
6.45%, 2029
PRICE (rupees) 99.74 99.99 99.65 99.99 99.88
YTM (%)       6.4846 6.4506 6.4971 6.4506 6.4655

 

 

  1515 IST   PRICE HIGH   PRICE LOW        OPEN     PREVIOUS
7.26%, 2029
PRICE (rupees) 104.06 104.28 104.00 104.28 104.18
YTM (%)       6.6571 6.6254 6.6658 6.6254 6.6399

 

MUMBAI–-1515 IST–Government bonds extended because of a rise in US Treasury yields, even as concerns over the Centre’s finances kept mood downbeat, dealers said. 

 

Yield on the 10-year US Treasury note was last at 1.85%, as against 1.78% at the previous close. A rise in US Treasury yields typically prompts foreign portfolio investors to reduce holdings of debt assets in riskier emerging markets such as India. 

 

“The fall (in bond prices) right now is because of the rise in US yields and swap rates are also rising so there is a bit of selling (in bonds),” a dealer with a private bank said. 

 

Concerns over the government’s finances had already knocked bond prices lower earlier in the day. Market participants fear that the Centre may have to resort to additional market borrowing because of weak tax collections and tax cuts made earlier this year. 

 

Dealers said some market participants were unwinding long bets ahead of the Reserve Bank of India’s monetary policy statement scheduled for Thursday. 

 

“Some people are cutting their long positions because they want to see the commentary and the guidance that they (RBI) will give at the policy,” a dealer with a primary dealership said. “The government’s revenues already look stretched and so people are just trading because of the sentiment surrounding the fiscal side.”

 

Market participants expect the RBI to lower interest rates by 25 basis points after data released on Friday showed India’s GDP growth in Jul-Sep fell to a 26-quarter low of 4.5%. However, bond dealers were unsure of how much more of the heavy lifting could the monetary policy do to revive economic growth. 

 

Yield on the 10-year benchmark 6.45%, 2029 bond is seen in a band of 6.45-6.50% for rest of the day.  (Suyash Pande) 


India Gilts:Dn on concern over govt finances, mkt awaits RBI policy

 

  1320 IST   PRICE HIGH   PRICE LOW        OPEN     PREVIOUS
6.45%, 2029
PRICE (rupees) 99.80 99.99 99.78 99.99 99.88
YTM (%)       6.4766 6.4506 6.4790 6.4506 6.4655

 

  1320 IST   PRICE HIGH   PRICE LOW        OPEN     PREVIOUS
7.26%, 2029
PRICE (rupees) 104.08 104.28 104.07 104.28 104.18
YTM (%)       6.6542 6.6254 6.6553 6.6254 6.6399

 

NEW DELHI–1320 IST–Government bond prices were down because growing concerns over the Centre’s finances dampened market’s appetite for dated securities, dealers said. 

 

Data released by Controller General of Accounts on Friday showed the Centre’s fiscal deficit at 7.204 trln rupees in the first seven months of 2019-20 (Apr-Mar), which accounts for 102.4% of the Budget target. 

 

Even though the fiscal deficit had accounted for 103.9% of the full year target last year, market participants are worried that weak tax collections as result of the economic slowdown and changes to corporate tax regime, which is pegged to cost the exchequer 1.45 trln rupees, are likely to pose a significant challenge for the government to meet its fiscal deficit target of 3.3% of GDP.

 

“Worries pertaining to fisc (fiscal deficit) have been playing in the market since there is still no clarity from the government on the same. Despite a fall in GDP, the prices are down because the market is risk averse about adding too much on their books if there’s a fiscal slippage,” a dealer with a private bank said.

 

According to data released by National Statistics Office, India’s GDP growth in Jul-Sep fell to a 26-quarter low of 4.5%, as against 4.6% growth expected by a Cogencis poll of 27 participants.

 

The losses were limited because the weak GDP growth in Jul-Sep has strengthened the case for the Reserve Bank of India to lower interest rates in its monetary policy meeting which concludes on Thursday, dealers said.   

 

In October, the RBI’s Monetary Policy Committee had said it will keep policy stance accommodative for as long as necessary to revive economic growth. The RBI has already cut interest rates by 135 basis points this year, the most in a single calendar year since 2009. 

 

“If you look at the price movement the fall is somewhat curtailed as traders are now eyeing the RBI policy, apart from the cut in interest rates, what will be more important will be the guidance hereon,” the dealer said.

 

Yield on the 10-year benchmark 6.45%, 2029 bond is seen in a band of 6.45-6.50% for rest of the day.  (Vaibhav Chakraborty)


India Gilts: Steady ahead of RBI policy; concerns over fisc weigh

 

  0950 IST   PRICE HIGH   PRICE LOW        OPEN     PREVIOUS
6.45%, 2029
PRICE (rupees) 99.83 99.99 99.78 99.99 99.88
YTM (%)       6.4721 6.4506 6.4790 6.4506 6.4655

 

  0950 IST   PRICE HIGH   PRICE LOW        OPEN     PREVIOUS
7.26%, 2029
PRICE (rupees) 104.15 104.28 104.09 104.28 104.18
YTM (%)       6.6441 6.6254 6.6528 6.6254 6.6399

 

MUMBAI–-0950 IST–Government bonds were largely steady as market participants refrained from placing large bets ahead of Reserve Bank of India’s monetary policy statement due on Thursday, dealers said. 

 

According to data released by National Statistics Office, India’s GDP growth in Jul-Sep fell to a 26-quarter low of 4.5%, as against 4.6% growth expected by a Cogencis poll of 27 participants. 

 

While weak GDP growth in Jul-Sep raised hopes that RBI would lower interest rates by 25 basis points, concerns over the government’s finances due to weak revenue collections and tax cuts made this year dented market’s risk appetite. 

 

“People are booking profits because the GDP growth number was along expectations,” a dealer with a private bank said. “The fiscal number on Friday are also having some bearing on the price movement.” 

 

As the RBI’s Monetary Policy Committee said that it would keep its policy stance accommodative for as long as necessary to revive economic growth, traders expect the RBI to cut the repo rate by 25 basis points. The RBI has already cut interest rates by 135 basis points this year, the most in a single calendar year since 2009. 

 

Data released by Controller General of Accounts showed the Centre’s fiscal deficit at 7.204 trln rupees in the first seven months of 2019-20 (Apr-Mar), which accounts for 102.4% of the Budget target. 

 

Even though the fiscal deficit had accounted for 103.9% of the full year target last year, market participants are worried that the weak tax collections as result of the economic slowdown are unlikely to help the government to meet the fiscal deficit target of 3.3% of GDP, especially after the cut to corporate tax in September which is pegged to cost 1.45 trln rupees to the exchequer. 

 

Yield on the 10-year benchmark 6.45%, 2029 bond is seen in a band of 6.45-6.50% for rest of the day. (Suyash Pande)


India Gilts: Seen up on fall in crude prices, hope of RBI rate cut

 

MUMBAI – Government bonds are likely to open higher because of an overnight fall in global prices, and on hope of the Reserve Bank of India lowering interest rates as data showed weak GDP growth in Jul-Sep. 

 

Crude oil futures for January delivery on the New York Mercantile Exchange ended $2.94 lower at $55.17 per barrel. A fall in crude oil prices has a softening impact on domestic inflation and strengthens the case for RBI to lower interest rates. The contract was last at $56.12 per barrel. 

 

GDP growth in Jul-Sep fell to a 26-quarter low of 4.5% as against 5.0% in the previous quarter and 7.0% in the year-ago period. The data was released after market hours on Friday.

 

As the RBI’s Monetary Policy Committee said its stance would remain accommodative for as long as necessary to revive economic growth, market participants expect the central bank to lower interest rates by 25 basis points. 

 

The central bank has already cut interest rates by 135 basis points in 2019, the most in a calendar year since 2009. 

 

However, rise in prices may be capped because of concerns over the government’s finances. Market participants expect the Centre to miss its fiscal deficit target of 3.3% of GDP because of a shortfall in revenue collections and tax cuts made earlier this year. 

 

On Friday, data released by Controller General of Accounts showed the Centre’s fiscal deficit at 7.204 in the first seven months of 2019-20 (Apr-Mar), which accounts for 102.4% of the Budget target for 2019-20. 

 

Even though government officials have said the Centre plans to meet its fiscal deficit target for this financial year, bond dealers are worried that the government may have to resort to additional market borrowing in a year when the gross market borrowing is already pegged at record high of 7.1 trln rupees. 

 

Yield on the 10-year 6.45%, 2029 bond is seen in a band of 6.43-6.48% as against the previous close of 6.47%. (Suyash Pande)

 

End

 

US$1 = 71.6500 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Arshad Hussain

 

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This copy was first published on the Cogencis WorkStation

© Cogencis Information Services Ltd. 2019. All rights reserved.

Source: Cogencis

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