Yields seen in 7.30-7.50% range

Another truncated and action-filled week for the domestic markets. The auction expiry apart, the week that went by saw some big moves in the fixed income markets. With Thursday and Friday going down as holidays for markets in India, volumes were high and activity brisk.

The US GDP for Q4 2017 was revised to a 2.9% annual pace while economists had expected growth to finish the year at a 2.7% rate. That data showed robust consumer spending and an uptick in inventories. For all of 2017, the economy grew 2.3%, after growing 1.5% in 2016. In other developments, investors breathed a sigh of relief as the Wall Street Journal reported that the US and Chinese officials had been negotiating potential trade concessions on the part of China even when Donald Trump announced as much as $60 billion dollars in tariffs.

Sentiment improved as a trade war would have been detrimental to global flows at a time when growth is just picking up. In another important development after three months of talks, negotiators from the US and South Korea agreed on modest amendments to the US-Korea Free Trade Agreement. The global equities saw little net change on the week amid choppy, headline-driven conditions. CBOE’s volatility index continued to remain elevated, but little changed at 22.5 while the US 10-year Treasury note yields fell 8 basis points (bps) to 2.76%.

The focus was more intense on the local market developments when traders started the week. Government’s borrowing calendar was announced on Monday after market hours. As per details provided, The Indian government will borrow a lower amount via bonds in the first half of the new fiscal year, in order to ease the pressure on the local debt markets. It will also borrow money for a shorter duration than it typically does. The plan envisages a borrowing quantum of 47.56% (as opposed to an average 55-60% in previous years) of its gross borrowing for the year, in the April-September period. The weekly auction size is also seen lowered to 12,000 crore and the belly of the rate curve, that is the 10-14year segment) will see lesser supplies.

All of these are supposed to ease the pressure on rates as markets had rushed far ahead of the rate curve in pricing rate-hike risks. From a high of 7.80%, the yields dropped to a low of 7.29% by Tuesday. Profit taking pushed yields tad higher towards 7.39%, 10y yield moved higher by about 78 bps during the financial year, even after a correction of about 42 bps. While the reduced borrowing in the H1 of FY 2019 appears to be a reaction to the firm yields and reduced appetite, the fundamental challenges remain. The fiscal deficit is one of the major concerns. The reduced borrowing will leave little room to accommodate fiscal uncertainties down like GST collections, states’ payout of HRA, MSP for agricultural produce and above all the risks from an average or sub-par monsoon.

It is likely the borrowing calendar could be higher in H2. The market is also pricing in the probabilities of an increase in FPI limits from current 5% to 7% over a few years. While this is positive for demand for debt and currency markets, much would depend on which segment of the supply curve the FPI increase is available for. The increase should be in the general segment so as to make it market-friendly.

The week ahead also sees monetary policy committee (MPC) meeting where no changes are expected. A status quo on rates, a possible tweak on SLR/HTM ratios, caution on inflation concerns and a possible addition of another member of the rate-hike seekers may be possible outcomes. The base effect should keep CPI in the 5-5.5% range for Q1 and therefore, nothing much to expect for growth-enablers, in the monetary policy. The range for the week expected in 7.50-7.30, wider though.

BORROWING RELIEF

• The market is pricing in the probabilities of an increase in FPI limits from current 5% to 7% over a few years
   
• From a high of 7.80%, the yields dropped to a low of 7.29% by Tuesday

The writer is a market expert