Upward pressure on bond yields expected owing to moderation in FII inflows: ICRA

New Delhi [India], Nov. 8 (ANI): A notification from ICRA on Wednesday revealed that an upward pressure on bond yields is expected; owing to continuing concerns regarding a potential fiscal slippage at the Union Government level and a moderation in FII inflows into debt coupled with other factors.

With the systemic liquidity surplus expected to moderate in H2 FY2018, open market operations (OMOs) through sales of Government securities (G-sec) are likely to be pared by the Reserve Bank of India (RBI), which would prevent the 10-year G-sec yields from rising above 7.0-7.1 percent.

"Despite the planned increase in FII limits in corporate bonds and G-secs, the headroom for additional FII investment in debt securities is limited," said Group Head - Financial Sector Rating, ICRA, Karthik Srinivasan.

"We expect FII debt inflows to be limited to USD 8-10 billion during H2 FY2018, lower than the inflows of USD 15.68 billion in H1 FY2018, which may exert some upward pressure on bond yields," he added.

There is a low likelihood that potential fiscal stimulus or accounting for bank recapitalisation bonds would trigger a meaningful fiscal slippage in FY2018.

Nevertheless, concerns regarding a slippage relative to the Government of India (GoI)'s fiscal deficit target of 3.2 percent of GDP for FY2018 continue to linger, particularly on account of lower-than-budgeted revenues given uncertainty related to buoyancy of indirect taxes post-GST, revenues from telecom and disinvestment flows, as well as the lower surplus transferred by the RBI.

Such fiscal concerns are likely to continue to keep bond yields at elevated levels.

The RBI conducted OMO sales of Rs. 600 billion during Q2FY2018, which contributed toward a decline in the liquidity surplus and also pushed up bond yields.

In October 2017, the RBI announced further OMOs of Rs. 200 billion.

In line with seasonal trends, the incremental bank credit off-take in the remainder of this fiscal is likely to be higher than incremental growth in bank deposits.

After netting off the CRR as well as the SLR requirements, ICRA estimates that additional credit off-take would exceed deposits by a sharp margin, resulting in a moderation in the systemic liquidity surplus during H2 FY2018.

Further, OMO sales is expected to be limited by the RBI, which would reduce the uptrend in bond yields.

The 10-year benchmark G-Sec yield rose sharply to 6.88 percent as on October 31, 2017 from the low of 6.41 percent as on July 24, 2017 driven by various factors such as increasing likelihood of a rate hike by the US Federal Reserve in December 2017, a slowing GDP growth in India that led to speculation regarding a fiscal stimulus package, and a potential slippage relative to the GoI's fiscal deficit target for FY2018.

The increase in oil prices since Q2 FY2018, which may widen the current account deficit and weaken the Indian Ruppee and the announcement of Public Sector Banks recapitalisation programme, also added to hardening of yields. (ANI)

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