The indicative yield for next week’s Treasury bond and state development loan (SDL) auction by the Reserve Bank of India (RBI) is persistent with the previous yields and on expected lines.
T-Bill yield for three-month, six-month, and 364-day is 6.71 per cent, 6.87 per cent, and 6.89 per cent, respectively. Rajasthan offers the highest interest rates in SDLs at 7.49 per cent on its 25-year bond.
As many as 13 states will participate in the weekly bond auction this time. They include Telangana, Andhra Pradesh, Kerala, Chhattisgarh, Haryana, Rajasthan, Gujarat, Maharashtra, Tamil Nadu, Meghalaya, Punjab, Rajasthan, and Goa.
Sovereign bond yields continue to trade sideways, with the supply and demand at nearly equal positions, on hopes that the monetary tightening policy action could be peaking. Equity markets also remained range bound, with prices moving back and forth as the US dollar appreciated.
Yet, due to the continued thrust on policy actions by some central banks abroad, bonds may trade with an upward bias. The minutes of RBI’s monetary policy committee (MPC) meeting released this week seemed “more hawkish than the market expectations”, says an expert.
Venkatakrishnan Srinivasan, the founder of Rockfort Fincap LLP and former Senior Vice President of Debt Capital Market at ICICI Securities, says: “Our bond market is more concerned about the continuing rate hikes by the UK, and by a few other central banks, even though, the Indian bond market generally doesn’t fully follow other central bank actions. However, their policy actions are giving enough signals to the market that fighting inflation across the globe is far from over. US Fed has also indicated they may continue to hike the rates further.”
Telangana, Tamil Nadu, Haryana, and Kerala are among some states offering more than 7.4 per cent returns on their long-duration bonds. Most economists believe the Indian economy will continue its momentum in the second quarter and beyond, despite the inflationary headwinds, tighter financial conditions, banking sector stress, and lingering geopolitical tensions.
Bond Market
Adds Srinivasan, “Large investors seem to be taking more interest in T-bills instead of long-term bonds as there is no clarity on the interest rate cycle.” On Friday, 10-year G-Sec closed at 7.07 per cent and is expected to trade between 7.05 per cent and 7.15 per cent next week. Besides, he says, the SDL auction for Rs. 22,450 crore may also keep the bond yields under pressure.
On the corporate bond market side, he says, “Major issuers like Power Finance Corporation, Kotak Mahindra Bank, and national housing bank are tapping the bond market through a private placement route. Thus, banks have begun their fundraising exercise this week.”
Srinivasan says the Kerala Infrastructure Investment Fund Board (KIIFB) is also expected to issue green bonds next week. Other major issuers who have plans to tap the bond market include Punjab National Bank, IDFC First Bank, SIDBI, and IRFC.
Most importantly, “Goswami Infratech Pvt. Ltd, a Shapoorji Pallonji group company having a local credit rating of BBB- has stormed the bond market with its large issue size of approximately Rs. 14300 crore. It is very difficult and rare to see such a large high-yield transaction in the Indian bond market. The issuance is expected to launch sometime next week.”
Economic Outlook
The MPC observed that capital flows were “cautiously returning” in the economy on renewed risk appetite, although concerns over weak external demand and elevated debt levels remain.
Data from the National Statistical Office (NSO) on May 31, 2023, shows India’s real gross domestic product (GDP) growth accelerated from 4.5 per cent year-on-year in the third quarter (Q3) of 2022-23 to 6.1 per cent in Q4, backed by fixed investment and higher net exports.
The Consumer Price Index (CPI) or consumer inflation also fell sharply from 6.4 per cent in February 2023 to 4.7 per cent in April 2023 due to favourable base effects, as food, fuel, and core inflation dipped. RBI notes that the headline inflation trajectory will likely be shaped by food price dynamics in the future.
Considering these factors and assuming a normal monsoon, RBI expects CPI inflation at 5.1 per cent for 2023-24 (Q1 at 4.6 per cent, Q2 at 5.2 per cent, Q3 at 5.4 per cent and Q4 at 5.2 per cent).
