The Hindu Business Line : Debt market players cautiously optimistic

PLAYERS in the debt market were cautiously optimistic on Thursday, as the Indian National Congress emerged as the single largest party. The markets on Thursday though volatile ended at Wednesday's closing levels with the daunting prospect of a hung Parliament clearly eliminated.

In the longer term well traded papers, prices opened almost 30 paise lower but gained as much as 80 paise only to end lower at levels similar to that of Wednesday's. The 8.07 per cent 2017 paper opened at Rs 123.50 rose to a high of Rs 124.30 and closed at Rs 123.80. The 10-year yield was unchanged from Wednesday's levels at 5.18 per cent. Volatility may continue, say market players, till the new Finance Minister's name is announced.

There are concerns, among market players, that the PSU disinvestment programme might be stalled since Congress although the single largest party would need the Left's support to form the government. This coupled with higher subsidies could erase the current cash surplus position of the Union Government. The government had been in a comfortable surplus position and had even cancelled sale of GOI bonds for the first time in history.

"Lesser or no disinvestments would mean that the government would have to borrow more from the debt market and if the increase is by as much as 15 per cent to 20 per cent from the projected one this could lead to a crowding out effect. This would mean that investors although they might have cash would prefer corporate bonds. This would also mean higher borrowing cost for corporates," said Mr M.S. Gopikrishnan, Senior Vice-President, IDBI Caps. The current fiscal's borrowing programme is pegged at Rs 1,40,000 crore.

The prospects could be bleaker if this is combined with an FII pullout from the equity markets. The treasury head of a PSU bank said, "The liquidity in the system could dry up if the government increases its borrowings and FIIs pullout at the same time. This could in turn put pressure on inflation and interest rates, which are all currently comfortable. The Indian rupee could also reverse the trend of appreciation seen over the last two years." But the current liquidity in the system of Rs 80,000 crore is sufficient for a comfortable two to three months. A lot depends on who will be the next Finance Minister and what his first Budget will look like?

A quick poll conducted by financial research firm, Credence Analytics of various active market players revealed cautious optimism in all segments of the financial markets. The debt market players are looking ahead to the Credit Policy meet scheduled for the coming week. As a general consensus, treasury and fund managers see the benchmark 10-year yield in a range of 5.10 per cent to 5.25 per cent in the three to six month scenario.

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