Mumbai: With high inflation a reality and inflation expectations rising, the Reserve Bank of India (RBI) is widely expected to raise interest rates. Meanwhile, the government has also announced it will spend an extra Rs25,000 crore this fiscal. Ritesh Jain, head of fixed income at Canara Robeco Asset Management Co. Ltd, on how the bond market is likely to react to the events. Edited excerpts:
The government has announced it’s going to spend more, but also said it won’t borrow more. How do you interpret this news and its impact on bond market?
Government is basically banking on two sources to fund its social sector spending. One is disinvestments and the other is 3G (sale of spectrum). But the timeline is too tight. If they overshoot the borrowing, bond yields will rise, which will lead to a general increase in borrowing cost for everybody. I think they might be able to control the expenditure side as budgeted, (but) there will be a problem of shortfall on the revenue side. I still expect that government will be forced to borrow Rs20,000-30,000 crore over the budgeted amount. Bond markets would remain range-bound because a little bit of slippage from the budgeted side is expected, and if they prepare the markets for it, then the bond yield won’t rise sharply from the current levels.
Changed times: Canara Robeco Asset Management’s Jain says India is in for range-bound movement in interest rates over the next one year. Rajkumar / Mint
Where do you see the 10-year yield in March?
We are looking at 10-year bond yields to top around 7.75-8% between January to March. The reasons for this could be rising inflation, and RBI increase (ing) interest rates or maybe the government going for another Rs20,000-30,000 crore of borrowing. But it’s difficult to see the 10-year (yield) moving beyond 8% in the next quarter.
We are of the opinion that the era of very high interest rates and very low interest rates is over. We are in for range-bound movement in interest rates over the next one year.
At what levels do you expect government borrowings next year?
This year they have announced a (fiscal deficit) of around 6.8% of GDP (gross domestic product). Next year, we expect around 6.5% of GDP. It’s very difficult to pinpoint the numbers because of what kind of disinvestments are they looking at next year, what could be Reliance (Industries Ltd’s Krishna Godavari basin) gas output next year. These are very open-ended things, but still they would like to curtail it within 6.5%. So I am not looking at borrowing which is higher than this year’s Rs4.5 trillion.
Do you have any concerns about credit quality of Indian companies?
We are of the opinion that credit concerns are not fully behind us. There is a high chance of double-dip recession in the second half of 2010. In that scenario, it’s reasonable to expect companies which did not take the advantage of deleveraging (their balance sheets) can come under some strain.
What are your thoughts on public sector unit-issues bonds?
The government has become a dominant part of the economy and anything related to government is actually doing much better than what it was doing previously. In that kind of environment, you would like to have something which is backed by sovereign (the government), which are PSU bonds. Some of these entities are in very good financial health.