Dec 10 2018

Indian Bond Weakness: An Exit Poll Impact

Indian bonds weakened today after exit polls showed mixed results for the BJP at the recently held state elections and on higher oil prices after OPEC members, its allies agreed to reduce output on Friday. The 10-year benchmark bond yield rose to 7.53 % from its last close of 7.46 %. In the last three months benchmark 10-year bond yield tested a high of 8.23 % and a low of 7.37 %. The damage got extended to Rupee as well which fell to 71.41 to the dollar, weakest since November 20 2018 and sharply down from Friday’s close of 70.80.  (Below chart indicating Bond Yield movement from Aug 2018 – Till today)

Exit polls are mixed where it is showing very close contest between BJP and Congress. The results of the assembly polls in five states — Chhattisgarh, Madhya Pradesh, Rajasthan, Telengana and Mizoram will be out tomorrow. Sentiment is expected to remain cautious until state election results are out.

International oil prices rose today extending gains from Friday when producer club OPEC and some non-affiliated producers agreed a supply cut of 1.2 million barrels per day from January that is 800,000 bpd reduction planned by OPEC-members and 400,000 bpd by countries not affiliated with the group.

Meanwhile, India’s current account deficit (CAD) widened to 2.9% of the GDP in the second quarter of the fiscal compared to 1.1% in the year-ago period, mainly due to a large trade deficit. The CAD was $19.1 billion during the quarter ended September 30, 2018 increasing from $6.9 billion or 1.1% of GDP in Q2 of 2017-18.

Along with exit polls, the higher oil prices and widening CAD is taking its toll on the Indian bond prices. These factors are likely to keep volatility in bond prices elevated in the near term.