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7 reasons G-secs will be a big draw for investors: BoAML

The News International Team

Yields on government securities (G-Secs) are likely to ease and that of a 10-year old G-Sec would come off to 8-8.25 percent by March, says Bank of America Merill Lynch. According to the brokerage firm, supply concern seems to be overdone and is likely to be one the reasons for the yields to fall from the current level of around 8.45 percent.

In a recent report authored by economists Indranil Sen Gupta and Abhishek Gupta, BofA ML has highlighted reasons why market participants could get attracted towards investing in G-Secs.

Also Read: Banks request clarity on bond taxation under Basel III

Excerpts from the report

Supply concerns overdone

Supply concerns are expectedly proving overdone. Our liquidity model shows that RBI OMO(open market operations)/government buyback Rs 558 billion (Rs63 billion so far) would clear the market.

Rs 1284 billion surplus with RBI, coal auction buffer borrowing

We do not lose any sleep over whether finance minister Jaitley meets his 4.1 percent of GDP fiscal deficit target or not. The Rs1284 bn surplus with the RBI and coal fines/ auctions should buffer the Rs 4673 billion net borrowing program from fiscal slippage.

1st RBI cut February as inflation meets 8 percent Jan ’15 target

We expect the RBI to cut 75 bp in 2015 from February with inflation on course to 6% in January 2016. Why? It would get the comfort of meeting its 8% January 2015 target. Second, late rains will likely water good winter sowing to douse agflation. Finally, Fed rate hike expectations should hold oil prices in check.

SLR cuts offset by LCR bank G-sec demand

The RBI should be done with SLR cuts for now after allowing banks to use 5% as level 1 HQLA(high quality liquid assets) to meet LCR (liquidity coverage ratio). The HTM (held to maturity) will be gradually cut to 22% by Sep 2015.

FII G-Sec limit to be raised to USD 30 billion

We continue to expect Delhi to raise FIIs’ G-Sec limits to USD 30 billion, phasing out separate SWF limits. Budget 2014 has already proposed to allow international settlement of debt securities through, say, Euroclear.

USTs have typically limited impact

Increase in UST yields (3.1 percent 10y Dec 2014 BAMLe), on Fed hike expectations, would have limited impact. As the RBI recoups FX reserves, it should be able to cut rates.

Lower oil prices, gold import curbs buffet stronger USD

We continue to expect the RBI to hold Rs58-62/USD, unless the US Dollar pierces 1.25/USD, on softer oil prices and gold import restrictions.


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