bond market: Gilt mkt could see a mismatch between supply and demand despite the inclusion of the index: UTI MF



NEW DELHI – Much has been said about the inclusion of Indian sovereign debt in global bond indices, with most analysts predicting foreign fund flows in the range of $ 35-45 billion, reaching the domestic market once that the event was to materialize.

UTI MF, however, believes that even this may not be enough to balance the scales of demand and supply in the government bond market, as the strong buyback pressure expected in the coming years means that the gross supply of gilts will probably remain too large.

“There is a possibility of a large gap between supply and demand for sovereign bonds, despite the assumption of an influx of $ 30 billion from REITs after the index is included. Given the large maturities in the coming years, borrowing could remain under pressure even in the years to come without significant central bank support, ”the fund house wrote.

Many market players believe the Center is likely to announce the inclusion of Indian sovereign debt in global indices in the Union budget for 2022-2023 (April-March), scheduled for February 1.

While the government has made progress in the process in recent months, traders have said that the issues related to taxation – particularly the long-term capital gains tax and withholding tax still need to be resolved before the inclusion of bonds in a global index can be officially launched.

The latest data on the Reserve Bank of India website showed government bonds worth Rs 3.8 lakh crore are expected to mature in the next fiscal year, while the repayment obligation for next year amounts to even more mind-boggling Rs 4.5 lakh crore.

Given that the Centre’s budget deficit, which increased during the COVID-19 pandemic as the government sought to spend more to fix economic growth, is not expected to decline significantly anytime soon, borrowing in the market is therefore expected. stay high. The gross government borrowing for an individual takes into account net cash requirements plus repayments.

UTI MF sets the total net borrowing in the central market and state governments at Rs 15.9 lakh crore in the next fiscal year, compared to Rs 20.2 lakh crore in the current fiscal year.

Considering the projected demand from various segments including foreign portfolio investors, the fund house estimates a gap of Rs 4.37 lakh crore in demand and supply which is expected to be filled by commercial banks. The calculation assumes deposit growth of 10 percent for the current and next fiscal year.

Indian banks are required to maintain a portion of their net demand and term liabilities – a proxy for deposits – in government securities as part of the statutory liquidity ratio. UTI MF assumes that banks can invest an additional 20 percent of their deposits in central government and state securities in the next fiscal year.

“One of the possible ways for the Center to close the borrowing gap is to mobilize resources through the monetization of assets. An overall monetization potential of Rs 6 lakh crore, over four years, from 2021-22 to 2024-25, is estimated within the framework of the National Monetization Pipeline, with an indicative value of Rs 0.88 lakh crore envisaged for the financial year In progress. However, the actual achievement will depend on the quality of the execution, ”said the fund company.

As the market enters the new calendar year and the last quarter of the current fiscal year, UTI MF predicts a greater degree of unpredictability in the money market curve, particularly if the RBI begins implementing policies. fine tuning announced in December.

The central bank, in its policy statement last month, said it would move the auction lane for floating rate repurchase agreements as the primary method of absorbing liquidity from January.

Recent RBI actions on the liquidity front suggest the central bank wants overnight rates to line up with the 4.00 percent repo rate instead of the reverse repo rate by 3.35 percent.

The reverse repo rate dictated the cost of funds to banks for about two years due to the record excess liquidity in the banking system.

In addition, the usual borrowing linked to last quarter’s balance sheet expansion by financial institutions, corporate credit-linked supply coupled with the RBI’s positional change / normalization expectations in April 2022 could make things right. precarious to begin with, “UTI MF wrote.



Comments are closed.