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Will debt markets take a hit post budget? - Outside View by PersonalFN

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Will debt markets take a hit post budget?
Jul 3, 2014

Pre-budget hope rally is taking equity markets to new highs. You may think bond markets have disappointed investors as they have hardly generated attractive returns in the recent times. However considering the economic situation of the country, it must be noted that bond markets in India have been reasonably resilient.

Despite of several negatives, bond yields of 10-year sovereign benchmark bond are still range-bound. Crisis in Iraq pose a threat of higher crude oil prices. This means, eventually India may witness higher inflationary pressure as it majorly depends on imported oil. Recently, petrol and diesel prices have been hiked. Non-subsidised LPG has also gotten costlier. Railway fares have gone up too. All these factors may push inflation higher. Weaker monsoon may translate to higher food prices. Fiscal deficit for the year 2014-15 has already reached to 45% of the yearly target within first two months. This is mainly on account of carried forward subsidies of nearly Rs 35,000 crore by the UPA government.

What does this mean for bond markets?

Higher fiscal deficit and risk of high inflation are negative for bond markets. Given the stickiness of inflation and threat of growing fiscal deficit, it is unlikely that RBI would go in for policy rate cuts any time soon.

As far as budget is concerned:

  • Recently, the Finance Minister suggested that there is no room for populous budget.

  • Investors hope that the bold decisions would be taken to instill financial discipline.

  • The government may focus on boosting revenues and cutting down subsidies.

  • Investors also expect the government to guide on implementation of Goods and Service Tax (GST).

  • Moreover, fast tracking of infrastructure projects and avoiding populous policies are expected to be thrust areas of the government.

PersonalFN is of the view that, bond markets are factoring in negatives that are known till now. They have been resilient on the hope that, the new government would announce stricter budget and avoid spending huge sums on welfare schemes. If the Finance Minister fails to fulfill these expectations, bonds might take a hit. Bond yields may shoot up again. Unless inflation and fiscal deficit fall, Indian debt markets may continue to remain under pressure.

PersonalFN believes, investors shouldn't speculate on movement and direction of bond yields. Investors should look at their time horizon before zeroing on the kind of debt instrument or debt fund they want to invest in. Longer duration funds come with high risk as compared to shorter duration funds.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund Research Firm known for offering unbiased and honest opinion on investing.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Will debt markets take a hit post budget?"

IndianMoney.com

Jul 15, 2014

The increase in the long term capital gains from 1 year to 3 years and the doubling of taxes from 10% to 20% is bad news.The new rules also increase dividend distribution tax. FMP and debt funds have no advantage against FD and this could kill debt mutual funds.

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