As India’s credit markets reel from a string of defaults, the nation’s top bond underwriter is taking refuge in the safety of government debt.
ICICI Securities Primary Dealership Ltd. prefers the shorter end of the sovereign bond curve as it expects the Reserve Bank of India to cut interest rates further to revive growth, according to Shailendra Jhingan, the firm’s chief executive officer. It is trading “opportunistically” in the long end, where it sees concerns over fiscal slippage limiting further gains after a strong rally.
“Sovereign debt is looking like the best option in an environment of risk aversion,” Mumbai-based Jhingan said in an interview. “There could be up to two more rate cuts. So short-term state-government bonds and gilts are core portfolios.”
Investors are growing wary of credit as India’s shadow-banking crisis is showing few signs of abating, even a year after a series of defaults by Infrastructure Leasing & Financial Services Ltd. exposed weaknesses in the sector. Refinancing risks for the nation’s non-bank financing companies are rising as they face of a record 1.1 trillion rupees ($15.8 billion) of local-currency bonds due next quarter.
Problems at some of the housing-finance firms “aren’t going to go away,” Jhingan said. “Some of them are selling their retail assets at significantly higher yield and paying short-term borrowers but that creates a problem for people who’re holding longer-term bonds.”
The NBFC crisis is also weighing on consumption in the economy, especially the real-estate sector, Jhingan said, adding that he expects another 25-50 basis points of rate cuts by the central bank to revive expansion.
“The growth slowdown is going to be there for the next 6-9 months at least,” he said.
India’s sovereign bonds are set to cap a third quarter of gains. The benchmark 10-year yield has slumped 59 basis points since the end of March as the central bank cut rates, Prime Minister Narendra Modi triumphed in elections and as slowing global growth spurred a worldwide rally in debt.
However, concern about the government’s fiscal discipline is now turning investors a little jittery ahead of next month’s federal budget.
“We are expecting slippage on the fiscal parameters and maybe in the second half we get an extra borrowing because of that,” Jhingan said. “The government won’t want to cut spending in a year when growth is slowing anyways, so you need some kind of stimulus there.”
Jhingan expects fiscal worries to limit further declines in the 10-year bond yield. He sees it falling to 6.60% in the next six months. That’s versus a level of 6.76% in Mumbai on Thursday.
“The scope for bonds yields to come down is not significant,” he said. “We are looking at a steeper curve so we like the two-to-five year segment more, while we are tactically trading on the belly of the curve, the 10-14 year segment.”