Money & Banking

‘10-year bond yield may drift to a new low by year-end’

NS Vageesh Priya Kansara Mumbai | Updated on January 16, 2018

SUNDEEP KAKAR, MD, Head - Investor Sales India & South Asia Markets, Citi India

The instruments are now in a new paradigm, says Sundeep Kakar of Citi India

With domestic equity markets being subdued for a while, falling yields in the debt market could help prop up the sentiments as interest rates/costs fall, according to Sundeep Kakar, Managing Director, Head - Investor Sales India & South Asia Markets, at Citi India. While the country’s balance sheet has improved significantly, good monsoons and Pay Commission hikes have only made India’s growth potential even stronger amid global developments, he told BusinessLine in an interview. Kakar’s views hold significance as he has been involved in various businesses and asset classes for Citi India. With over 25 years of experience across derivatives, gold, structured products, markets and as a core member of the team that set up Citi's brokerage and distribution arm, he keeps his ear close to the ground, looking continuously for signals of change in market mood as well as ground-level changes. When we asked him for signs of improvement in the economy to justify his optimism, he pointed across the window to the increased level of construction activity at a half-completed building across a couple of blocks, as a symptom of change.

Stepping off a long overseas flight after pitching to foreign buyers, Kakar showed little signs of jet lag and handled queries with the practised ease of a salesman. Excerpts from the interview:

How is India viewed at the current juncture by foreign investors?

The Indian story is well known to investors worldwide now, which is corroborated by the overweighting of India in their respective equity portfolios. Indian debt is high on the radar of investors globally as evident by the good utilisation of the overseas debt limits.

Which country is close to India in terms of attractiveness? Where does China stand?

While India is very often compared with Indonesia (slightly easier to get in and get out but currency is volatile), Vietnam has also appeared on the list for the first time.

China already is too big and in the world bond index. Foreign investors are exposed, and have allocations, to China.

Why do you expect a rate cut in the upcoming monetary policy?

If you look at the pure inflation numbers, we are in for another rate cut. We feel December inflation will be far lower than what it is today.

The current inflation numbers do not factor in the lower prices of pulses. However, the Monetary Policy Committee will have to factor in the global headwinds from upcoming events, such as the US elections and the US Fed rate hikes.

But banks are still not cutting rates for borrowers. Your views...

The marginal cost of funds-based lending rates (MCLR) is now formula based and if input costs are lower, then they have to come down further. The trajectory is downwards. The corporate sector has already moved into the commercial paper market, where transmission has already happened. It should happen in MCLRs too.

Will the Fed hike rates?

The Citi view is that the Fed may hike in December but no one is expecting a steep hiking cycle. The market currently is a divided house on its view on this, primarily because of the US elections closing in. Hence, the jury is yet to take a call.

If the Fed hikes rates, won’t there be a pull-out of foreign funds?

India is a country with stable macros and growth rates of 7.5 per cent plus. It will be very difficult to ignore this country. If one looks at the balance sheet of our country — inflation, current account deficit, balance of payment surplus, economics, growth, fiscal responsibility, etc — things stack up in our favour. Foreign investors understand the Indian markets very well.

Where do you see the yield on the 10-year benchmark bond? How low can it go?

With an emerging structural shift in the inflation regime and with the central bank proactively managing liquidity, I believe that bonds are in the new paradigm and thus, from current levels, could drift to a new low towards the year-end. We believe that we are on the brink of a structural change, in inflation and interest rate curves. It wouldn’t be a surprise if within two years we test the earlier traded lows of the 10-year benchmark.

Do you see capital-raising via non-convertible debentures picking up?

Definitely. Corporate bonds follow the G-Sec yields. In fact, that recent public issues of various corporates were oversubscribed on day one itself indicates that investors expect interest rates to fall further. HR Khan’s suggestions for growth of the corporate bond market is a step in the right direction and will help increase issuances in the coming periods.

Don’ t you think the timeframe provided by the RBI for large companies to cut down their exposure to banks and move to the bond markets is very short?

I don’t think so, as the market is large enough to absorb the same. Retail investors are hungry for assets. If you give them a right-priced asset, it will fly. Also, I believe we are about to have a structural change in inflation and interest rates cycles in the country, which will be conducive to debt issuances.

Are FIIs worried about Indian equity markets’ high valuation?

The consumption story and the favourable monsoons add to the high growth potential of the Indian economy. As fixed income rates go down, equity valuations will be supported. Also, the earning yield gap (E/P, bond yield) still at the 10-year average levels suggests that equity valuations are probably not that expensive compared to bonds.

Published on October 27, 2016

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