While the equity markets and rupee have held their ground, the "cautious mood" is most palpable in the debt markets, the multinational banking and financial services corporation said in a daily market report.
DBS noted that 10-year bond yields climbed for a fifth consecutive month into December (6.5 per cent in June 2017 to over 7.2 per cent in December - one-and-a-half-year highs), with momentum strengthening due to a confluence of unfavourable factors on both the demand and supply front.
Eyes are on upcoming event risks -- two state election results due on 18 December (stakes are higher in Gujarat), the winter parliament session, November trade numbers, and fiscal developments, which will dictate near-term action, believes DBS.
"Beyond that, factoring in the recent sell-off and the likelihood of a weaker macro profile, we see reason to be cautious, nudging up our yield forecasts for the year ahead," the report stated.
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Beyond this year, five states go the polls in 2018, and five more until the General Elections in the first half of 2019. The crucial states are Rajasthan, Karnataka, and Madhya Pradesh, with a bigger weight in the Upper House of Parliament, it added.
Overall, risks are building on the horizon, muddied by the rise in commodity prices.
Despite this modest deterioration, it is amply clear that the metrics are still in a far better shape than in 2013. The bond issuance calendar will be busy for the December 2017 quarter, but is expected to ease off into January-March 2018.
In the face of surging yields, the authorities deferred some issuance, conducted debt repurchases, and raised limits for foreign portfolio debt interests (FPI), which has provided temporary relief from the supply end.
"Ten-year yields have risen by more than 50 bps since end-September as the market gravitates to our view that fundamentals (rising price pressures and a widening current account deficit) have become a lot less conducive for bonds.
"Notably, headline inflation rose 4.9 per cent year-on- year (against consensus estimates of a 4.3 per cent rise) in November, further supporting our case that a modest rate hike cycle may be poised to begin in 2019," it said.
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