Mumbai: Investors should buy India’s one-year bank and government debt to profit from rising demand for the securities as spending boosts cash in the financial system, according to Calyon Bank (Credit Agricole CIB).
Yields on one-year debt issued by banks, or so-called certificates of deposit, will fall from near a three-year high as lower money market rates make it cheaper to buy securities with borrowed funds, said Vikas Goel, executive director at Calyon’s India unit in Mumbai.
Losses from any increase in yields will be smaller on short-dated notes than on long-maturity bonds as inflation quickens and the government borrows more, he said.
“The front end of the yield curve offers good value and defence,” Goel said, referring to one-year debt. “Yields on one-year bank debt are attractive and should ease as banks’ cash surplus rises. Treasury bills, too, offer good carry.” A yield curve is a graph charting the yields of bonds with different maturities.
Goel said he expects the yield on top-rated, one-year bank debt to decline to between 8.5% and 9% as early as June, from an average 9.3%.
Yields on top-rated bank debt due in one year rose to 10.6% in March, the highest since Bloomberg started compiling data on the securities in July 2005. The government last sold one-year treasury bills at 7.35% on 26 March. Benchmark government bonds due in 2017 yielded 7.94% on 31 March.
Indian banks, which hold 70% of outstanding government bonds, typically buy more debt than shares as the Reserve Bank of India (RBI) caps their equity investment at 40% of their capital and cash reserves.
Union finance minister P. Chidambaram plans to increase spending in the new fiscal year to spur economic growth that may have slowed for the first time since 2005. Asia’s third largest economy probably expanded 8.7% in the year ended 31 March, according to a government forecast, compared with 9.6% in the previous year, the fastest since 1989. Increased government spending may create surplus cash of between Rs50,000 crore and Rs1 trillion in the banking system in the coming weeks, putting pressure on overnight rates to fall, Goel said.
“The cash surplus will push the overnight money rate close to the central bank’s 6% reverse repo rate this month,” he said. “That will make it attractive to buy higher yielding certificates of deposit and treasury bills.” The rate banks charge each other on overnight loans climbed as high as 9.95% on 31 March, the most in more than two months. India’s bond, currency and money markets were closed on Tuesday for fiscal year-end book-keeping by banks.
Goel doesn’t recommend buying longer-dated Indian bonds as they are at risk of falling as inflation quickens and the government starts its bond sale programme for the 12 months started 1 April.
Wholesale prices rose a faster-than-expected 6.68% in the week ended 15 March from a year earlier, the most in 13 months, a government report showed on 28 March. RBI governor Y.V. Reddy said on 31 March the inflation rate is “unacceptably high” and the central bank is ready to take steps to contain price gains.
India plans to borrow Rs96,000 crore in the first half of this fiscal year, compared with Rs59,000 crore in the six months through March. The government is scheduled to sell Rs50,000 crore of debt in April and May, the largest amount in such a period.
Securities due in 10 years and more will account for about 88% of India’s borrowings in the six months through September, according to RBI, which detailed the sale plan on 24 March.