INDIA BUDGET ROUNDUP: Fiscal Discipline Seen Reviving Fund Flows
(Bloomberg) -- Finance Minister Jaitley’s adherence to the government’s fiscal road map keeps hopes of further rate cuts alive and will spur fund inflows into India, providing support to the rupee, analysts say.
- Global investors have reduced holdings of local shares and bonds by a combined $3.7b so far in 2016
- Rupee up 0.2% today to 68.2700 per dollar; currency has weakened 3.1%, second-worst performance among Asia’s most- used exchange rates
- Budget deficit will narrow to 3.5% of GDP in the year starting April, Jaitley told parliament in his budget address; he also outlined gross borrowing of 6.0t rupees ($87.8b), less than 6.8t estimated in a Bloomberg survey
- Following are excerpts from published research:
- Strategists including Rohit Arora at Barclays:
- Fiscal discipline and foreign-direct investment liberalisation are medium-term positives for INR, but lack of sweeteners for corporates means the near-term sentiment boost is limited
- INR’s relative underperformance is more related to investor positioning and less due to fundamental weakness; retains end-2016 USD/INR forecast at 70.5000
- Retains recommendation for being long nation’s bonds in short end; expects any rally in long end to be shallow amid a sustained supply-demand mismatch
- Kritika Kashyap and Kewei Yang, strategists at Morgan Stanley:
- Supply dynamics are bullish for bonds; commitment to fiscal targets has allayed investor concerns on fiscal slippage and raised expectations for RBI to proceed with rate cuts at its meeting in April
- Expect 10-year bonds, now yielding 7.63%, to trade in 7.60%–7.70% range over the near term before liquidity eases toward March-end, providing further support to yields
- Despite investor expectations for a rate cut, don’t position in NDOIS steepeners
- Strategists including Vivek Rajpal at Nomura:
- Suggests staying constructive on bonds, but recommends being selective on the curve; investors should stay with notes of maturities less than 10 years
- Maintains long-term 8.27% 2020 govt bond position partially hedged by paying NDOIS 5-year
- INR appreciation momentum could persist in near term while medium-term outperformance prospects are somewhat damped by risk of lower proceeds from asset sales and lower quality of expenditure
- Economists including Tushar Poddar at Goldman Sachs:
- Lower market borrowing may reduce the quantum of open- market operations that the RBI may be required to do
- There is significant risk of one more rate cut at the April policy meeting, depending on upcoming inflation data
- Irene Cheung, senior FX strategist at ANZ:
- April rate-cut hopes have improved post budget, which will provide impetus to inflows; that will provide reprieve to INR
- Up channel in USD/INR will likely remain impact; keeps short 6-month TWD/INR NDF trade
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Irene Cheung (Australia & New Zealand Banking Group Ltd)
Kewei Yang (Morgan Stanley)
Kritika Kashyap (Morgan Stanley)
Rohit Arora (Barclays PLC)
Tushar Poddar (Goldman Sachs & Co)
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