The November retail inflation hit a 40-month high, while the October industrial output
fell 3.8 percent year on year, dropping for the third straight month, with all three major sectors -- mining, manufacturing and electricity - shrinking, according to the government data published on Thursday.
There are reports that FII limits may rise to 10 percent for G-Secs. Will this ensue a rally in bonds, is the big question.
Amandeep Chopra, group president and head of fixed income, UTI Mutual Fund is of the view that while the increase in the foreign institutional investor (FII) limit could be somewhat positive, it won't be a big driver because if one were to look the recent flow data, even with the existing limits have barely been utilised meaningfully.
"I think the market will focus largely on the fallout from the consumer price index (CPI) print because if you have looked at the revised estimates for December month as well, clearly that does trend towards an upward sloping curve as far as CPI headline is concerned, which is going to be a big worry,” said Chopra, adding that you also have a marginal supply side issue today - there is an auction and the market sense is that the auction may not be as well bid as one would have expected it earlier given the choice of securities and again the backdrop of this data.
"So, I don’t think the newsflow around limits increases for the foreign portfolio investors (FPIs) is going to mitigate more broad negative sentiment as far as the markets are concerned,” said Chopra in an interview with CNBC-TV18.
According to Chopra, technically bond markets are looking a little oversold, so one could see a couple of basis points rally but if the auction does not go through smoothly then yields may harden to 6.8 percent today.
Talking about IIP numbers, Indranil Pan, chief economist at IDFC First Bank said “Index of industrial production suffers from huge amount of volatility. The October number is relatively better than what most of the market was expecting but one will have to see how the trend pans out."
"Some of the positives are that the auto sector possibly have been doing better but as we see from the Society of Indian Automobile Manufacturers (SIAM) data, the auto sector also in November had once again slumped. So, some of the implication for the IIP for October was mostly the festive demand and the festive month and festive production, which may not sustain going forward,” Pan noted. Therefore, this is the data that we need to watch but may not help as much in terms of projecting gross domestic product (GDP) going forward,” Pan added.
With regards GDP number, Pan said, “We are looking at 5 percent overall GDP growth for the year, which definitely means that the H2 will be better than H1,” Pan said, adding that most of the policy push from the government and the Reserve Bank of India (RBI) will start to seep into the system.
"So, expect the transmission to happen since credit growth is much lower than the deposit growth and there is scope for banking sector to cut lending rates further," said Pan. "As per the RBI data, the fresh loan transmission has been better than the existing loans. That is another thing to watch out,” he added.
Speaking about the range for 10-year bond yields for the next financial year, Pan said, “Given the sense of the fiscal deficit, given the fact that we are looking at CPI moving further up in the next couple of months, given the telecom price increases that would be factored into the CPI number, the overall bias for 10-year GSec would be on sell side."
However, clarity will better be achieved after the February 1 budget and we will have to look through the borrowing numbers also for the next year, said Pan, adding that the only thing that we don’t know at this point in time is whether the RBI is ready to do open market operations (OMOs). "The broad range for the next financial year, possibly looking at a floor of about 6.6 percent on the 10-year and a cap of about 7 percent. So, the broad range should be about 6.60 to 7 percent," said Pan.
When asked if 6.6 to 7 percent would be the range for the 10-year bond yields, Chopra replied, “In the near-term it looks very likely – the key trigger for the markets is still the budget. Expectations, which were still out there among few participants that you could see a rate move by RBI in the next policy meet, I think now are low probability event with current inflation trajectory.”