Published on 9/10/2017 4:20:08 PM | Source: Kotak Securities Ltd
Fiscal worries weigh on bonds - Kotak Sec
* Cautious RBI weighs on bonds.
Bond market started the past week with light positioning ahead of the RBI policy. Even as market was largely placed for no rate cut, there were expectations of a somewhat dovish-neutral tone. As it turned out, RBI kept policy rates unchanged, but sounded neutral-hawkish on the policy stance ahead. Markets sold off significantly post policy, and continued to trend up during the rest of the week. The 10-yr benchmark paper closed at 6.76%, up ~9.5bps WoW. This week has started on a sluggish note, owing to post policy hangover. The next trigger will be the upcoming CPI inflation print, which is likely to inch up further on the back of unfavorable base effect, higher energy inflation and HRA hikes, even as food inflation looks contained. We expect the benchmark 10-yr yield to trade in the range of 6.70-6.80% through the week.
* RBI to remain on status quo in FY2018.
RBI expectedly kept policy rate unchanged at 6% with 5-1 vote, given the upside risks to inflation even as it acknowledged the widening output gap. RBI also lowered the Statutory Liquidity Ratio (SLR) by 50 bps from 20.0% to 19.5%, effective October 14, 2017. The ceiling on SLR securities under ‘Held to Maturity’ (HTM) will also be reduced in a phased manner from 20.25% currently to 20% by December 2017 and to 19.5% by March 2018. RBI has revised up its CPI inflation trajectory marginally for 2HFY18 to 4.2-4.6% (including center’s 7CPC HRA) from August policy estimate of 4.0-4.5%, with 4.2% in 3QFY18 and 4.6% in 4QFY18. Higher oil prices, fiscal risks and bottoming out of food prices has kept RBI cautious on inflation. RBI has revised down the FY2018 real GVA growth projection by 60 bps to 6.7%.but expects a cyclical rebound in 2HFY18. We expect headline inflation to inch towards 4.7% by end-March 2018 given the adverse domestic and global conditions. We reiterate our call for a pause for the rest of FY2018, and reckon that incoming data has to surprise significantly for RBI to open up any room for cut.. In this context, we will monitor the evolution of (1) food production, (2) downward surprise of core inflation owing to weaker-than-expected growth, (3) second-round impact of lower excise duty on petrol and diesel and (4) fiscal status.
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