Foreign portfolio investors may take note of weak corporate earnings, as disinflation worries plague India Inc.’s revenue and profit.
The risks will be balanced by robust foreign portfolio investments (FPIs) in bond markets (USD2.1bn in the month till 15 October 2015) on high Indian real yields. Further, Asian currencies should trade firm on the lack of negative triggers, while the US dollar (USD) may strengthen against the majors such as the euro and Japanese yen on relative growth and inflation dynamics.
Global Calmness to Keep Indian Markets Range Bound: Ind-Ra opines stronger than expected China GDP growth and expectations of Fed rates on hold for a while will lead to benign global sentiments. We are entering into a phase of consolidation in global currency markets ahead of European Central Bank’s monetary policy decision this week and the US Federal Reserve Meeting later during the month.
China’s growth downturn has been arrested for now (GDP for 3Q15 at 6.9% vs expected 6.8%) as the increase in fast paced services, infrastructure spends and consumption countered the decline in manufacturing and exports.
Separately, US data remains mixed. Although consumer confidence and core inflation (particularly services inflation) indicate that the US economy is chugging along, the expectations of Fed normalising rates have been pushed to 2016 on a poor jobs report as well as on the lack of trade, industrial and retail sales data along with the complete absence of inflation pressures elsewhere within the US economy.
Bullish Steepening of Bond Curve to Continue: Amid ongoing benign global developments and heavy FPI interest in India, the bond market is likely to consolidate hereon, with yields likely to soften.
Interest on the front end of yield curve has been strong, resulting in the bullish steepening of the curve (5x10 spread down 11bp vs 14bp fortnight ago). Over the week, the interest of foreign portfolio investors in G-sec was particularly noted in short-end high-yielding securities (Figure 1). We expect this momentum to continue and yields may soften in range of 2bp-5bp through the week.
FPI to Benefit G-sec Market: With the state development loan (SDL) limit fully utilised, FPIs may pour into the G-sec market. We expect the market to remain well bid with limit worth INR30.42bn still available in G-secs.
On the states’ front, Ind-Ra observes that foreign portfolio investors have been differentiating between credits, and selectively investing in SDLs. The biggest beneficiaries of the fresh flows have been Maharashtra, Tamil Nadu and Gujarat. These SDLs have broadly traded at spread of 35bp-40bp over the benchmark 10-year G-sec.
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