With insurance companies, banks and pension funds not participating in the bond market aggressively, there is a growing gap between supply and demand in the bond market. Devang Shah, head ( fixed income) Axis Mutual Fund, which has Rs 1.25 lakh crore in debt schemes, tells Christina Titus this could be addressed, if the government reduces the supply of long duration bonds by 3-5%. Excerpts:
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For the overall economy, GST rationalisation is very positive. From a bond market perspective, the impact on monetary policy is largely neutral, as fall in CPI will largely be negated by positive impact on GDP. Also, if the fiscal tool is utilised, monetary policy can take a backseat. However, a bigger concern is about the demand-supply dynamics for bonds when the government resorts to fiscal measures. Further, when the pay commission recommendations are implemented next year, there could be significantly larger payouts. This raises questions about how the government will manage fiscal discipline moving forward.
While borrowing numbers may not change significantly this year due to available fiscal levers, gross borrowing could increase by around Rs 1–1.5 lakh crore annually over the medium term. This is concerning given the currently weak demand in the bond market, mainly driven by reduced incremental buying from pension funds, insurance companies, and banks, largely due to regulatory changes. This has led to widening gaps in supply and demand, where government borrowing supply remains constant or may even increase next year, but demand is not keeping pace. One possible way to alleviate this pressure would be for the government to reduce the supply of longer-duration bonds by 3–5%.
How do you see bond yields play out in the near-term?
We expect the benchmark bond yield to trade in a range of 6.30-6.50% in the near term. However, if there is significant fiscal expansion, the yield could move towards 6.75%. As mentioned earlier, the demand-supply dynamics are currently not working in favor of the bond market, which is why we have seen a rise in yields for government bonds, especially in long bonds. With the GST cuts, the RBI is likely to project inflation for next financial year 50-70 bps lower,
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