Punctured optimism in equity markets
The Indian bonds was volatile over the past week on uncertainties over the maiden offshore sovereign bonds issuance, according to a report by Singapore’s DBS Group Research on 31 July 2019.
10Y bond yields rose to 6.56% mid-week and corrected back below 6.40% 30 July 2019 after reassurances from Finance Minister Nirmala Sitharaman that the offshore bond issuance plan was on track, it noted.
The Reserve Bank of India (RBI) board will meet on August 16 to discuss the issuance.
Foreign portfolio investors (FPIs) have shifted from equities to debt this month. FPIs turned net sellers in equities for the first time since January, according to the report.
Tax proposals outlined in the Budget, including higher tax incidence on FPIs and high net worth individuals, in addition to tax on buybacks, punctured some of the optimism in the equity markets.
Investors have moved to debt; net inflows amounted to US$1.3 billion as of July 1-29.
“Sentiment was helped by renewed rate cut expectations; we look for a 25bp cut at the August review,” said the research report.
Minister Sitharaman was also cited calling for cuts to support the economy, where growth is likely to stay sub-6% in 2Q19 vs an already soft 5.8% YoY in 1Q.
Global cues are under watch. The Fed is widely expected to deliver a 25bp rate cut on July 31.
“With global yields staying low, we expect 10Y Rs bond yields to be in the 6.30-6.45% range ahead of the early August policy meeting, and the 2Y yield rooted just above 6.0-6.1%,” said the DBS report.
Cash conditions are in surplus of ~Rs.1 trillion and are likely to stay so ahead of the advance tax payments.
Flush liquidity pushed the country’s largest public sector bank to trim their fixed deposit rates across different tenors, which could stoke expectations for a cut in lending rates down the line.
On the downside, this will do little to lift deposits, which have consistently lagged credit growth this year, underpinning the loan-deposit ratio, said the report. fiinews.com