 "Chance of a downgrade has abated in the short term: Pradeep Madhav")
Pradeep Madhav, managing director of STCI Primary Dealer tells Neelasri Barman in an interview that there are expectations of a 50 basis points cut in policy rates in the current fiscal due to which government bonds will trade with a positive bias in the first half of 2013-14. Excerpts:
The RBI has recently auctioned the new 10-year bond 7.16% 2023. What is the outlook of the yield by December 2013? What are the factors that will impact the yield movement?
The outlook for yield is dependent upon factors, both domestic and global. Amongst domestic, macro economic data points, inflation and inflationary expectations are of key importance. Supported by a favorable base and the impact of lagged transmission of RBI’s earlier actions, we expect the Wholesale Price Index (WPI) to average around 5.50% in the first half of the fiscal.
Current account deficit (CAD), which is way above the comfort level, will be influenced by global developments and demand conditions. RBI’s policy action will be guided by all the above factors. At the moment, we cannot see more than 50 basis points cut in the policy rates in the current fiscal. We expect bonds to trade with a positive bias in the first half of the fiscal driven by hopes of some more easing.
Considering the yield has dropped with the introduction of the 7.16% 2023 bond, where are the spread between the 10-year benchmark government bond and the 10-year 'AAA' PSU corporate bond headed?
The spread between 10 year PSU ‘AAA’ and benchmark 10 year has hovered at about 70 basis points in the past few months. With the cut off of the new 10 year government security having come much lower, there is a scope of further rally in the 10-year AAA PSU corporate bond by around 10-15 basis points. However we expect the spread to be in the range of 55 to 75 basis points which will depend on the quantum of supply of the AAA PSU corporate bond at any given time.
The auction of inflation indexed bonds are in June. How do you perceive the demand situation for these bonds? The RBI also said the auction for these bonds for retail investors will be done later. Do you think demand by retail investors will be encouraging?
Though the initiative of the RBI to introduce bonds which provide a hedge against inflation is appreciable, its success will depend on a number of factors. To begin with market participants would like to have some more clarity and comfort on issues like valuation and accounting.
RBI along with Fixed Income Money Market and Derivatives Association of India has been talking to market participants to understand their doubts and clarify them before the bonds are auctioned. Once the market has conceptual clarity not only of the product but such other aspects we expect the bonds to generate a good amount of interest. It is however important that the initial issuances be small, say about Rs 1,000 crore to enable market to get used to the product.
The auction size can then be increased gradually once the appetite for the product builds. The success of retail issuance of the inflation linked bonds is a little more tricky. The relative advantages over other financial products will need to be weighed before retail interest gets generated. Linking the inflation indexed bonds for retail to the Consumer Price Index (CPI) instead of the WPI would also help.
S&P said 'BBB-' ratings on India affirmed but outlook remains negative. Do you think the chances of a downgrade have been abated now? According to you what all steps will ensure that there is no downgrade?
The chance of a downgrade have definitely abated in the short term. However it is important to immediately work towards losing the “negative outlook” tag. The government’s continued commitment to reigning in the fiscal deficit and the step taken to walk the talk are going to be closely watched. Urgent steps by the government to addresses structural bottlenecks and concerted efforts towards resolving of policy issues leading to higher growth would be of importance in the coming months.
The RBI has recently auctioned the new 10-year bond 7.16% 2023. What is the outlook of the yield by December 2013? What are the factors that will impact the yield movement?
The outlook for yield is dependent upon factors, both domestic and global. Amongst domestic, macro economic data points, inflation and inflationary expectations are of key importance. Supported by a favorable base and the impact of lagged transmission of RBI’s earlier actions, we expect the Wholesale Price Index (WPI) to average around 5.50% in the first half of the fiscal.
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However thereafter inflation could gradually inch up and move towards 6% by end March. The inflation trajectory in second half of the fiscal 2013-14 will depend to a great extent on the monsoon and its impact on supply side pressures. The Gross Domestic Product (GDP) data for first quarter and second quarter of the current year will also have a bearing on the fiscal numbers.
Current account deficit (CAD), which is way above the comfort level, will be influenced by global developments and demand conditions. RBI’s policy action will be guided by all the above factors. At the moment, we cannot see more than 50 basis points cut in the policy rates in the current fiscal. We expect bonds to trade with a positive bias in the first half of the fiscal driven by hopes of some more easing.
Considering the yield has dropped with the introduction of the 7.16% 2023 bond, where are the spread between the 10-year benchmark government bond and the 10-year 'AAA' PSU corporate bond headed?
The spread between 10 year PSU ‘AAA’ and benchmark 10 year has hovered at about 70 basis points in the past few months. With the cut off of the new 10 year government security having come much lower, there is a scope of further rally in the 10-year AAA PSU corporate bond by around 10-15 basis points. However we expect the spread to be in the range of 55 to 75 basis points which will depend on the quantum of supply of the AAA PSU corporate bond at any given time.
The auction of inflation indexed bonds are in June. How do you perceive the demand situation for these bonds? The RBI also said the auction for these bonds for retail investors will be done later. Do you think demand by retail investors will be encouraging?
Though the initiative of the RBI to introduce bonds which provide a hedge against inflation is appreciable, its success will depend on a number of factors. To begin with market participants would like to have some more clarity and comfort on issues like valuation and accounting.
RBI along with Fixed Income Money Market and Derivatives Association of India has been talking to market participants to understand their doubts and clarify them before the bonds are auctioned. Once the market has conceptual clarity not only of the product but such other aspects we expect the bonds to generate a good amount of interest. It is however important that the initial issuances be small, say about Rs 1,000 crore to enable market to get used to the product.
The auction size can then be increased gradually once the appetite for the product builds. The success of retail issuance of the inflation linked bonds is a little more tricky. The relative advantages over other financial products will need to be weighed before retail interest gets generated. Linking the inflation indexed bonds for retail to the Consumer Price Index (CPI) instead of the WPI would also help.
S&P said 'BBB-' ratings on India affirmed but outlook remains negative. Do you think the chances of a downgrade have been abated now? According to you what all steps will ensure that there is no downgrade?
The chance of a downgrade have definitely abated in the short term. However it is important to immediately work towards losing the “negative outlook” tag. The government’s continued commitment to reigning in the fiscal deficit and the step taken to walk the talk are going to be closely watched. Urgent steps by the government to addresses structural bottlenecks and concerted efforts towards resolving of policy issues leading to higher growth would be of importance in the coming months.