 "Only one-third of FII limit in corporate debt utilised: S K Dubey")
S K Dubey, managing director at PNB Gilts, talks about the debt market scenario with Neelasri Barman. Edited excerpts:
How do you see government bond yields reacting in the near term, as there are expectations of additional government borrowing?
Currently, the better way to look at yields will be in the range of 8.75-8.85 per cent till the Budget, which is likely to be announced a month down the line. But sometimes rumours in the market also affect yields.
OMOs have never been announced too much in advance. It happens as and when the situation arises. OMOs are probably a better route for injecting liquidity because the yields are also influenced. OMO depends on market conditions, which might eventually decide whether or not the OMOs would be used by RBI.
Considering we have seen flows from foreign institutional investors (FIIs) of more than Rs 6,000 crore in debt so far this month, do you see these flows continuing?
In government debt, the FII limit is $30 billion and so far the utilisation is only 53.5 per cent. In corporate debt, the FII limit is $51 billion and till now it has been utilised only 33.7 per cent, which is just one-third. As such there is enough headroom available for FIIs to invest.
The limit for FIIs to invest in short-term instruments has been cut. Do you see willingness by these FIIs to invest in long-term securities?
That depends on how the yield curve behaves. If the yields curve is such that treasury bills are trading at 8.87 per cent and 10-year bond yields trading below that, this skewed nature of yield curve could restrict inflows in long-term bonds. Currently, Indian market is probably most attractive for these FIIs in emerging markets segment due to which flows are coming in shorter tenure bonds. The market euphoria might further add to it.
Do you see inflation again becoming a concern due to below-normal monsoon?
Currently, there is no forecast of an extremely bad monsoon. Except when the situation of monsoon is very adverse, bond market might manage normal variations. We might wait and watch.
What is your expectation from the RBI’s monetary policy next month?
We are expecting a status quo on key policy rates. But even if there is a status quo, we are more focused on what shall be the guidance.
With a stable government coming into power, do you think it will be easier for Indian companies to raise funds in global markets through issue of debt?
As we are aware, RBI has imposed restriction on corporates for raising short-term funds from overseas markets based on guarantees of domestic banks. However, banks might raise medium term notes (MTN) in overseas market if they have profitable deployment avenues.
With the carry-on government bonds being almost negligible and the uncertainty in the markets having increased in recent times, do you think standalone primary dealers (PDs) are prone to challenges?
Standalone PDs always had more challenges because they are single product players with little add-ons. Having said that, we should also understand that standalone PDs have been there in the market for a long time. Their understanding of the market and their capacity to deal with the challenges has also improved. In FY13, on a net basis, the 10-year bond yield declined by 62 basis points. But, in FY14, the yield went up by 84 basis points due to which the challenges were more. Despite that we made profits and even other PDs made profits largely because their trading skills have improved and their understanding of the market is better.
How do you see government bond yields reacting in the near term, as there are expectations of additional government borrowing?
Currently, the better way to look at yields will be in the range of 8.75-8.85 per cent till the Budget, which is likely to be announced a month down the line. But sometimes rumours in the market also affect yields.
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Do you expect open market operations (OMOs) this financial year by the Reserve Bank of India (RBI), considering the market is now expecting additional borrowings by the government?
OMOs have never been announced too much in advance. It happens as and when the situation arises. OMOs are probably a better route for injecting liquidity because the yields are also influenced. OMO depends on market conditions, which might eventually decide whether or not the OMOs would be used by RBI.
Considering we have seen flows from foreign institutional investors (FIIs) of more than Rs 6,000 crore in debt so far this month, do you see these flows continuing?
In government debt, the FII limit is $30 billion and so far the utilisation is only 53.5 per cent. In corporate debt, the FII limit is $51 billion and till now it has been utilised only 33.7 per cent, which is just one-third. As such there is enough headroom available for FIIs to invest.
The limit for FIIs to invest in short-term instruments has been cut. Do you see willingness by these FIIs to invest in long-term securities?
That depends on how the yield curve behaves. If the yields curve is such that treasury bills are trading at 8.87 per cent and 10-year bond yields trading below that, this skewed nature of yield curve could restrict inflows in long-term bonds. Currently, Indian market is probably most attractive for these FIIs in emerging markets segment due to which flows are coming in shorter tenure bonds. The market euphoria might further add to it.
Do you see inflation again becoming a concern due to below-normal monsoon?
Currently, there is no forecast of an extremely bad monsoon. Except when the situation of monsoon is very adverse, bond market might manage normal variations. We might wait and watch.
What is your expectation from the RBI’s monetary policy next month?
We are expecting a status quo on key policy rates. But even if there is a status quo, we are more focused on what shall be the guidance.
With a stable government coming into power, do you think it will be easier for Indian companies to raise funds in global markets through issue of debt?
As we are aware, RBI has imposed restriction on corporates for raising short-term funds from overseas markets based on guarantees of domestic banks. However, banks might raise medium term notes (MTN) in overseas market if they have profitable deployment avenues.
With the carry-on government bonds being almost negligible and the uncertainty in the markets having increased in recent times, do you think standalone primary dealers (PDs) are prone to challenges?
Standalone PDs always had more challenges because they are single product players with little add-ons. Having said that, we should also understand that standalone PDs have been there in the market for a long time. Their understanding of the market and their capacity to deal with the challenges has also improved. In FY13, on a net basis, the 10-year bond yield declined by 62 basis points. But, in FY14, the yield went up by 84 basis points due to which the challenges were more. Despite that we made profits and even other PDs made profits largely because their trading skills have improved and their understanding of the market is better.