Indian Govt securities seen as safe haven

The Indian government securities market could see a positive spin-off from the downgrade in the US' sovereign credit rating, say market experts.

They are expecting institutional investors, foreign and domestic, to gradually unwind their positions in domestic equity markets and park funds in safe-haven Indian government securities as a hedge against any fallout of the downgrade.

S&P downgraded the US' sovereign credit rating on Friday from ‘AAA' to ‘AA+' (with negative outlook) on account of political risks and rising debt burden.

Notwithstanding the signs of an economic slowdown emerging in the country in the form of lower industrial output, overseas investments are seen flowing into a ‘relatively stable and growing' India.

Yield on the benchmark 10-year government security 7.80 per cent maturing in 2021 could soften by about 10-15 basis points in the coming week, say market players. Yield and price of a government security are inversely co-related.

Yields on government securities fell on Friday to close 9 basis points lower at 8.31 per cent, tracking their US counterparts, as increased concerns of a global economic slowdown sent investors scurrying towards safe-haven government bonds, said IDBI Bank in a report. During the week, the 10-year benchmark ended lower than last week's close by 14 basis points.

“With no signs of a third round of quantitative easing, the feeling is that interest rates may not go up and even the Reserve Bank of India will have to pause. So, it is likely that bond yields may ease,” the Treasury Head of a public sector bank said.

The rupee is seen strengthening further as foreign investments will likely chase growth in a relatively stable Indian economy. This will impact exports. However, the positive impact will be that India's oil import bill could come down, bringing down inflation.

Market players see the rupee strengthening to 44 to the dollar in the next couple of weeks against Friday's close 44.7350 to the dollar.

“The market was prepared for a notch down in the US rating. Just because the rating has been downgraded, it doesn't mean the world economic order is going to change. However, what could happen is that countries and financial institutions that were traditionally investing in US Treasuries will now start looking at other instruments to diversify risks,” said Mr P Sitaram, Chief Financial Officer, IDBI Bank.

The US downgrade could impact India through three channels – sentiment, trade and investment, said Dr Brinda Jagirdar, General Manager and Head of Research, State Bank of India.

The brinkmanship by the US administration and the Republican-dominated House of Representatives on raising the federal debt ceiling and cutting fiscal deficit could have a ripple effect in the form of a vitiated global trade and investment climate.

“Unlike China, India's exports and foreign exchange reserves are well diversified. This diversification could act as a hedge against any adverse global repercussions emanating from the US and the strengthening of the rupee,” said Ms Jagirdar.

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