Exit polls fail to cheer bond mart
May 14 2014 , Mumbai
Yields on the benchmark 10-year government securities inched up by just nine basis points after the post-poll surveys predicted a majority verdict for the Narendra Modi-led National Democratic Alliance (NDA) in the national elections.
Some analysts say more than equities, the inner workings of bonds give a better sense of the health of an economy, as fixed-income investors are more attuned to the current and near-term risks. A steeper yield curve is considered harbinger of growth.
FIIs pumped in Rs 7,000 crore into the country in May, of which Rs 4,500 crore went to debt. “The debt market is guided by statements from the Reserve Bank of India (RBI),” said Siddharth Rath, president of treasury and business banking at Axis Bank.
“Political developments did have some impact on yields initially, but those got wiped out due to higher-than-expected yields in state development loans.”
Cutoff yields in 10-year state development loans stood at 9.24 per cent to 9.25 per cent. The movement in yields was more in reaction to interest rate expectations than exit poll projections.
Harihar Krishnamoorthy, treasurer with First Rand Bank, said the government securities market did not have a direct relationship with political developments. “The union budget and RBI credit policy have direct impacts, as yields are rate-sensitive. FIIs have brought in more money to the bond market, specially corporate bonds, compared with the equity market.”
A senior treasurer said the yields were immune to the political developments. “They are rate sensitive, so they reacted more to the inflation data than to exit poll projections.”
Retail inflation jumped to 8.6 per cent in April from 8.3 per cent in the previous month, as food inflation rose to 9.8 per cent. While prices of fruits and vegetables contributed 50 per cent to the rise in inflation, core inflation remained unchanged.
Crisil said the central bank is likely to hold ground in the June money policy review even if retail inflation hovers between 8.3 per cent and 8.8 per cent in the coming months. “The underlying inflation momentum is evident. Weakness in domestic demand continues to persist for now,” the rating agency said.
March industrial production data disappointed, declining 0.5 per cent. Assuming the construction sector output grew at the same pace as the first three quarters, the Q4 GDP growth would be barely 0.4 per cent and suggests a possible downward revision in FY2014 GDP estimates, Crisil said.
Radhika Rao, an economist, “Much rests on the ability of the new government to revive the investment cycle and productivity. Policy action might be able to pull the brakes on slowdown in the industrial sector, but the bottoming-out process is likely to last through the first half of 2014-15.