Rupee seen at 67 to US dollar
The outlook for India government bonds remains challenging but some value may be emerging after the sharp sell-off over the past six months, according to a Singapore bank.
In addition to renewed supply pressure into Fiscal Year 2019 domestically, developed market yields are likely to rise further as monetary normalisation continues, said DBS Banking Group.
“Under these circumstances, INgov Indian government bond) yields are still likely to face upward pressure,” said DBS in its market report on 20 Mar 2018.
“However, we think that the bulk of the sell-off may be behind us and yield increases are likely to be more modest going forward,” said the bank.
“Notably, India’s CPI has eased somewhat, reducing any urgency to hike rates, allowing our tactical view of favoring shorter-term bonds to play out.
We are neutral-to-negative longer-term bonds and still see yields heading higher,” it said.
While India’s 10-year real yields (3.2%) look high compared to peers across the region and the 2-year/10-year spread (at 71bps) is wide by historical standards, there could be better entry points in the coming months as the market digests increased issuances, DBS observed.
As for the Indian rupee, it has been depreciating with the Indian equities since the end of January.
As of 19 March, the rupee had depreciated -2% year to date (ytd) against the US dollar while the Sensex fell more by 3.3% ytd.
The vulnerability of the exchange rate to the weak stock market is understandable, believes DBS.
India needs capital inflows to fund its current account deficit which has more-than-doubled to 1.9% of GDP in April-December vs 0.7% the same period a year earlier.
“We expect the savings-investment gap to widen to 2-2.2% of GDP in FY19 from a projected 1.8% in the current FY ending March 2018,” said the bank.
As of September 2017, India’s short-term external debt totaled 3.8% of GDP.
It did not help that Indian bonds had been under pressure since mid-2017, but this was due mostly to a wider fiscal deficit, felt DBS.
Overall, India’s financing requirements will keep the rupee vulnerable to rising US rates this year, especially if they weigh on global equities.
“Our view remains for the rupee to depreciate towards 67 this year,” said DBS. fii-news.com
