Investor appetite for debt will sustain for the rest of the fiscal year on waning supplies even as the market readies itself for a series of aggressive poilicy rate increases, a senior debt fund manager said on Wednesday.
Federal supply will drop as the government will sell less than half the amount it sold in the first half and its appeal as a savings instrument will stay as the nation lacks social security, said Maneesh Dangi of Birla Sunlife Mutual Fund.
"After a long time we are seeing the demand-supply situation is favouring bonds including state loans. This November-December we should have a bit of rally in bonds," said Dangi, who has 420 billion rupees of assets under management.
"In a country like ours where the social security is not in place demand for debt would always be larger than equity. Equity is s very small component of Indian savings about 6-7 percent 94 percent is still fixed income," he added.
The benchmark 10-year bond yield which had slipped to a record 4.86 percent after a hefty rate cut by the Reserve Bank as part of its stimulus package.
The 10-year yield has risen more than 200 basis points so far in 2009 mainly due to excessive debt supplies in the market.
The 10-year benchmark was trading at a yield of 7.27 percent at 4.50 p.m. and Dangi expects the yield to drop to 7 percent in a couple of weeks. He sees it trading in a 6.90-7.50 percent range for the next three months.
The Reserve Bank of India last week laid the groundwork for a rise in interest rates by tightening credit to the commercial property sector, lifting its inflation forecast and warning of a threat from asset price bubbles.
While policy rates are expected to rise in coming months, the prices suggest an aggressive hiking cycle, he said.
Federal supply will drop as the government will sell less than half the amount it sold in the first half and its appeal as a savings instrument will stay as the nation lacks social security, said Maneesh Dangi of Birla Sunlife Mutual Fund.
"After a long time we are seeing the demand-supply situation is favouring bonds including state loans. This November-December we should have a bit of rally in bonds," said Dangi, who has 420 billion rupees of assets under management.
"In a country like ours where the social security is not in place demand for debt would always be larger than equity. Equity is s very small component of Indian savings about 6-7 percent 94 percent is still fixed income," he added.
The benchmark 10-year bond yield which had slipped to a record 4.86 percent after a hefty rate cut by the Reserve Bank as part of its stimulus package.
The 10-year yield has risen more than 200 basis points so far in 2009 mainly due to excessive debt supplies in the market.
The 10-year benchmark was trading at a yield of 7.27 percent at 4.50 p.m. and Dangi expects the yield to drop to 7 percent in a couple of weeks. He sees it trading in a 6.90-7.50 percent range for the next three months.
The Reserve Bank of India last week laid the groundwork for a rise in interest rates by tightening credit to the commercial property sector, lifting its inflation forecast and warning of a threat from asset price bubbles.
While policy rates are expected to rise in coming months, the prices suggest an aggressive hiking cycle, he said.
EXTENT OF HIKES
"I agree with the market that there would be rate hikes. The rate-easing cycle has ended and asset prices will in general reflate now, but I don't agree with the market on the extent it would be," he said.
He said traders expect the central bank to raise its policy rates by more than 100 basis points within the next three months.
In January, we would see a 50-basis-point increase in the repo and reverse repo rates and the cash reserve ratio (CRR), he said.
This expectation of sharp increases means bond yields may not rise as much when policy rates are actually increased, he added.
"Now the rate hike cycle... you know it's going to be there but the anxiety of the market is so much that it wants a premium to move from the easy to tight cycle which is why they are trading at such levels... but when rate hikes begin they will start to normalising," Dangi said.
Dangi said he expected the central bank to put in place liquidity control measures which would help counter the effect of the incremental foreign fund inflows without penalising markets.
"We are relatively looking up right now which has a lot to do with the fiscal stimulus and the base effect," he said.
He said that demand for fixed maturity plans would improve in the run up to March after rate tightening starts.
"We can't indicate rates anymore now but yes, the delivery of return would improve in the run up to March because as we get into the rate hiking cycle, the premium is likely to increase in the shorter end."
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