Jan 31 2019

Bond yields inch higher on fears of fiscal slippage

Bond yields inch higher on fears of fiscal slippage The Indian 10 year benchmark bond yield has been on a rise for past few weeks as the pressure on fiscal builds up. The expectation of fiscal target of 3.3 percent of GDP for FY19 is likely to slip to 3.5 percent which has in turn eased the bond prices. Bond prices are inversely related to bond yields.

With the interim budget due tomorrow morning, the yield has risen by about 30 basis points. The Reserve Bank India’s monetary policy committee meeting is due on Feb 7 wherein the market is broadly expecting a status quo on the interest rate in line Bank of Japan, European Central Bank and Federal Open Market Committee maintaining their interest rates. With an exception from People’s Bank of China, wherein the interest rates were reduced by 100 basis points in two tranches.

The last tranche of open market operations (OMO) for January was completed today in order to support the liquidity stance from RBI. Now the plan to buy back the bonds worth Rs 375 billion in February will take shape, taking the total for FY19 to Rs 2.86 trillion.

Beyond the near term events of Budget and MPC, the market will keenly watch out for the general Lok Sabha elections which are due in April-May. With the promise of ‘Minimum Income Guarantee’ to the poor, Congress has put more pressure on the incumbent having lost the state election last month.

Technically the chart is trying to go beyond the 5 month downward channel trend lines (marked in blue) though for the last month or so it’s moving in an uptrend channel (pink lines). The yield is likely to inch even higher from here towards the 7.688 mark seen tested in Jan, Mar and Nov 2018. Relative strength indicator (RSI) is neutral hovering around 50.