FY19 Outlook: Bonds and Indian Rupee to Face Headwinds

Bond yields are likely to rise during FY19 and the 10-year government security (G-sec) is likely to trade at 7.5%-7.6% by FYE19, according to India Ratings and Research (Ind-Ra). On the other hand, Ind-Ra expects the Indian rupee to trade with a mild depreciation bias. The agency estimates the domestic currency to trade at an average of 66.06/USD in FY19.

Domestic macroeconomic conditions, both fiscal and monetary, are likely to exert pressure on the bond market. Ind-Ra expects the government of India's fiscal deficit to stand at 3.5% of GDP in FY18 and 3.2% of GDP in FY19. As a result, net central government market borrowings are likely to stand at INR4.5 trillion (gross borrowings: INR6.55 trillion) in FY19. Furthermore, a high recourse to market borrowing by states could translate to higher state development loans (SDL) issuance. Ind-Ra estimates the total SDL issuance for FY19 at INR3.7 trillion (FY18 estimated: INR3.5 trillion). Thus, SDL spreads are likely to stay elevated in FY19.

Ind-Ra believes that the eventual normalisation of balance sheets of major global central banks, such as the US Federal Reserve, is unlikely to be sharply disruptive for the Indian rupee and bond markets. In Ind-Ra's assessment, the Indian rupee will continue to be affected by factors such as position of balance of payments, relative inflation and growth differential with the US and nature of capital flows.

Ind-Ra expects the current account deficit to widen to 1.9% of GDP in FY19 (FY18 estimated: 1.6% of GDP) and an overall balance of payment position of USD20.2 billion during the period.

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