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India’s sovereign bond market has been jittery of late, with investors bracing for the government to announce populists measures in the Budget due this Friday. Bank of America Merrill Lynch is not perturbed.
“Bonds are poised to rally as fears about fiscal slippage are overdone and the central bank will likely start easing policy as early as next week,” said Jayesh Mehta, who, in August, correctly predicted the end to the sell-off in local bonds.
Markets will be positively surprised on the fiscal front, said Mehta, the country treasurer at the bank.
The yield on the most-traded 2028 bonds has risen in four of the past five weeks as Prime Minister Narendra Modi’s administration prepares an aid package to appease farmers, a key voting block, ahead of elections due by May.
The size of relief measures has been the subject of intense speculation, with the additional expenditure varying from ₹70,000 crore to as high as ₹3 lakh crore. The concerns about the health of India’s finances have coincided with a rebound in prices of oil – India’s top import – and below-average revenue from Goods and Services Tax and asset sales. A drop in oil prices in the final three months of 2018 and purchases by the RBI had helped bonds log their best quarter in four years.
The government will meet its fiscal deficit target of 3.3 per cent for the year ending March, while it may slip marginally from next year’s 3.1 per cent aim, said Mehta. Any deviation will be met from additional revenues and by way of a higher dividend from the RBI, he said.
It’s not the first time Mehta, 55, has bet against market consensus. He correctly predicted the RBI would lower rates in 2017, when practically everyone was expecting a hike. Last August, he called time on the surge in benchmark yields.
Now, he expects the central bank to roll back two hikes from last year that together added up to 50 basis points because of slowing inflation. That is as a Bloomberg survey shows the policy rate remaining unchanged at 6.5 per c
ent for the March quarter. The RBI’s rate-setting panel is due to announce its decision on February 7.
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