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4
November 2016
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Bond (The Total Investment & Insurance
Solutions)
Emerging global risks will keep the Indian
debt markets on the defensive and limit gains, given that domestic corporate
bond spreads have already narrowed to near a one-year low, says India Ratings
and Research (Ind-Ra). The Total
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The ratings agency says it believes that an
uptick in global yields and several upcoming high-impact events globally will
limit the softening of domestic bond yields and keep the rupee volatile.
According to Ind-Ra, Indian corporate bonds
are in a sweet spot presently (generic one-year bond spread over Government
securities (G-sec) averaged at 37 basis points (bps) in October 2016, while
five-year spread averaged 39bps -lowest in 2016)- limiting the scope for
incremental outperformance from hereon.
It says, "The focus for the Indian
DebtFX markets will shift from the Reserve Bank of India (RBI)'s accommodative
monetary policy to two major drivers, global developments and consequent risk
appetite and incremental G-sec purchases through open market operations (OMOs).
Surge in Global Yields Signals Caution, Rupee
to be Conduit of Transmission
The ratings agency says, the scope for G-sec
yields to soften incrementally is limited, as globally government bond yields
inch higher. The narrow spread between G-sec and developed market yields will
keep the domestic debt market circumspect, as globally, economies brace for a
potential reversal in yields from the June 2016 lows. Central banks of major
developed economies expanded their monetary policies, as the countries battle
deflationary pressures amid the fragile growth outlook. The low-rates phenomena
pushed global bond yields to multi-year lows in June 2016. However, as central
banks are left with fewer policy tools, the need for fiscal support has
resurfaced. This has unsettled global bond investors - leading to a sharp surge
in government bond yields, it added. The
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Ind-Ra says it believes that, in event of
risk aversion resurfacing, the rupee will emerge as the first line of
transmission of global risks to domestic financial markets. The potential
resurgence in risk aversion and as a fallout a fall in investment flows will
keep the rupee vulnerable and it may come under mild depreciation.
Plateauing of Rates
The 175bps repo rate cut since the start of
2015 translated into G-sec yields softening by 110bp-140bp across the yield
curve. The Total Investment &
Insurance Solutions
With a benign inflation trajectory, Ind-Ra
says, the RBI will have room to ease rates by another 25bp by end-FY17.
"However, with a large part of the easy monetary policy cycle already
underway, incremental softness in bond yields will be reined in. The bond
market will shift focus from the central bank's policy actions and the two
major drivers hereon will be RBI's liquidity operation through OMOs and global
developments and outcomes of several high-impact events - upcoming US
presidential election, US Federal Reserve's timing of imminent rate hike,
Organisation of Petroleum Exporting Countries (OPEC) meeting will force
investors to reassess their risk appetite and fund allocations.
Corporate Debt Market Spreads Narrow
Corporate bonds are currently in a sweet
spot, though Ind-Ra says it believes that the room for spread compression going
forward is limited and will largely be a function of the recovery in the
corporates' financial health, along with an improvement in the earnings
outlook.
Generic AAA rated public sector undertaking (PSU)
yield spreads over the corresponding G-sec are hovering in range of 40bps-60bps
across the curve, while State Development Loan (SDL) spreads too are in same
range. The Total Investment &
Insurance Solutions
"The narrowing differential in spreads
of SDLs and corporate bonds, pickup in issuance of SDL in 2HFY17 and the
proactive debt management by states suggest that corporate bonds will be
impacted by the trends and quantum of SDL issuance, going forward," the
ratings agency concluded.The Total
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