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Govt bond yields could slide below 6% this year

Last Friday, the benchmark closed at 6.36 per cent after hitting a 31-month low two days earlier.

, ET Bureau|
Jul 22, 2019, 07.51 AM IST
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Asian Development Bank (ADB) has trimmed New Delhi’s growth forecast for this financial year to 7 per cent.
Mumbai: Benchmark bond yields this year could slide below 6 per cent, a threshold last touched before WhatsApp’s birth, India’s cricket World Cup triumph on home soil, and Manmohan Singh’s return as a second-time premier.

An ET survey of 23 market participants showed that the yield on India's 10-year bond is set to slump by December-end to 6 per cent or less. The gauge had hit such a trough on January 28, 2009, in the immediate aftermath of the global financial crisis. And much like the last time, experts believe record low costs of debt funding will now fuel an investment boom that has remained in the anticipation zone the past few years.

“The overall lower yield environment seems to be here now for a longer time frame, as economic growth both at home and abroad seems to slow, with benign inflation,” said Vijay Sharma, head of fixed-income at PNB Gilts, a Delhi-based bond house. “Negative yields in most of the developed markets will ultimately make yield-hungry global investors turn to stable regions such as India.”

The range of expectations is rather wide. Darashaw & Co believes India’s 10-year paper could yield even 5 per cent and two other participants expect 5.75 per cent to be the yearend level for bonds. At the other end of the spectrum are a private sector bank and a UK-based financial services firm: Both believe yields may harden slightly from here — in the range of 6.50-6.75 per cent.

Last Friday, the benchmark closed at 6.36 per cent after hitting a 31-month low two days earlier.

“The benefits of falling yields are largely going to the government and state-run companies, which see lower market borrowing costs,” said Rajeev Radhakrishnan, head of fixed-income at SBI Mutual Fund. “This should slowly trickle down to private-sector companies. Investors are now giving preference to credit quality amid default concerns.”

Those polled in the survey believe the Reserve Bank of India (RBI) could further lower rates, perhaps by 50 basis points, until December to lift investments amid a plunge in global yields. A basis point is 0.01 per cent.

“Yields would be in the lower end of the range and could break 6 per cent if the forward-looking view on the repo turns even more benign,” said B Prasanna, head, global markets group at ICICI Bank. “Most central banks are guiding monetary policy accommodation as the first line of defence in the wake of a growth slowdown.” Government bonds of France, Germany, Spain and Japan are yielding negative returns, meaning investors pay interest for the privilege of owning sovereign debts. The US Treasury benchmark yield has slipped more than 70 basis points in the past six months.

Back home, wholesale inflation and core inflation in June softened to two-year lows of 2.08 per cent and 4.1 per cent, respectively. Retail inflation rose to 3.18 per cent from 3.05 per cent in May, but remained within the central bank’s target range. India’s economy expanded at the slowest pace in five years. In the January-March quarter, the gauge slowed down to 5.8 per cent versus 6.6 per cent a quarter earlier.

Asian Development Bank (ADB) has trimmed New Delhi’s growth forecast for this financial year to 7 per cent from 7.2 per cent estimated earlier.

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