Personal Finance

G-sec yields to fall

BL Research Bureau | Updated on October 12, 2014 Published on October 12, 2014

Thomas M Perkins/

BofA-ML pegs 10-year bonds at 8.25% in March

A Bank of America Merrill Lynch report released last week expects 10-year G-sec yields to ease to 8-8.25 per cent by March. To investors in instruments such as infrastructure/tax-free bonds or post-office schemes, this could mean less attractive returns. Investors in gilt mutual funds, though, may benefit from a rally in bond prices. Here are the reasons why G-sec yields may fall, according to the report:

Coal auctions to buffer

There were several risks to Finance Minister Arun Jaitley’s 4.1 per cent fiscal deficit target. These include ambitious tax projections, dependence of disinvestment targets on Fed tapering and risk of expenditure overrun due to deferrals from last year. These, the report says, will now partly be countered by proceeds from coal mine fines/auctions of more than $5 billion. The Centre also has a surplus of ₹1,284 billion with the RBI as of March 31, 2014, that can be drawn down, if needed. The drop in oil prices is another positive.

RBI rate cut in February

The report expects the RBI to cut interest rates by 75 basis points in 2015, beginning February, with inflation set to peak at 8 per cent in January 2015 and 6 per cent in January 2016. Late rains will likely facilitate winter sowing to douse inflation. Finally, the Fed rate hike expectations should hold oil prices in check. They expect the yield curve to flatten as the market prices in the possibility of RBI rate cuts.

Cuts in SLR (now 22 per cent), would be compensated by G-sec demand from banks to meet LCR (Liquidity Coverage Ratio) requirements, according to them.

Supply concerns overdone

Supply concerns are proving to be overdone. Borrowing for the second half of 2014-15 has been cut by ₹80 billion. What's more, open market operations/Government buyback of securities maturing beyond FY15 to the extent of ₹55,800 crore would clear the G-Sec market.

Limited impact

The US Treasury moves are expected to have limited impact on Indian G-sec yields. It is for this reason they do not think that any increase in US Treasury yields (3.1 per cent for 10-year yields by December 2014), driven by Fed rate hikes, will prevent G-sec yields from falling. They believe the RBI can cut rates even if the Fed hikes rates by June.

FII limit may be raised

They expect an increase in FIIs' G-Sec limits to raise forex reserves. FIIs have almost entirely utilised their $25-billion limit. The report calls for doing away with the separate limit for Sovereign Wealth Funds, as these are not utilised since many of them invest through FIIs.

Offsets for strong dollar

Finally, they continue to expect the RBI to hold the rupee at 58-62/USD. The rupee is seen settling at 62 a dollar in December, with the dollar settling at 1.25/euro. Softer oil prices and gold import curbs are offsetting the strong dollar, according to them.

Published on October 12, 2014

A letter from the Editor

Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.