Barclays Leads Bond Bulls as Modi Frontloads Spending for Growth

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  • Sees 10-year sovereign yield falling to two-year low of 7.25%
  • Surge in tax collection to help meet deficit-cutting goal

Higher tax revenue is feeding bullish forecasts on Indian rupee bonds as Prime Minister Narendra Modi ramps up fiscal spending without wrecking his budget goals.

Barclays Plc sees the benchmark 10-year yield dropping 52 basis points to end the year at a more than two-year low of 7.25 percent, the most bullish forecast among analysts surveyed by Bloomberg. That compares with Standard Chartered Plc’s end-2015 projection of 7.40 percent and the 7.60 percent median estimate in an August survey of eight forecasters. All see yields falling.

Money managers including DSP BlackRock Investment Managers Pvt. are buying longer-dated bonds on bets that Modi’s fiscal discipline and slower inflation will allow the central bank to add to three interest-rate cuts this year. India looks set to meet a goal of cutting the deficit to an eight-year low of 3.9 percent of gross domestic product in the year ending March 2016, Barclays said, after revenue rose 18 percent in the four months through July.

“We maintain our bullish view on bonds,” said Rohit Arora, a Singapore-based interest-rate strategist at Barclays. “The disinflation and ongoing fiscal consolidation are all very supportive for a secular bull market in bonds.”

The 10-year sovereign yield fell two basis points this month and nine basis points in 2015 to 7.75 percent as of 10:05 a.m. in Mumbai on Monday, data compiled by Bloomberg show. The rupee is 0.4 percent weaker at 66.7575 a dollar in September, after dropping 3.5 percent last month.

Capital expenditure such as that on roads, ports and power plants in the April-July period was 38 percent of the full-year target compared with 23 percent in the same period of 2014, official data showed last week. While that resulted in India’s budget deficit reaching 69 percent of the annual goal, Barclays economists Rahul Bajoria and Siddhartha Sanyal estimate the government has room to exceed its 17.8 trillion rupee ($267 billion) planned spending by an additional 1 trillion rupees without threatening its 3.9 percent deficit target.

The government’s financial reforms haven’t been without setbacks. In his budget statement in February, Finance Minister Arun Jaitley revised the March 2017 goal for the budget gap to 3.5 percent of GDP from 3 percent, citing the need to boost infrastructure spending. The introduction of a uniform goods and services tax regime is among measures stalled by opposition lawmakers.

“Structural, fiscal reforms are taking longer to come through,” said
Andrew Colquhoun, Hong Kong-based head of Asia-Pacific sovereign rankings at Fitch Ratings. “They’ve postponed the fiscal consolidation timetable. Government debt is high compared to other countries in its peer group.”

India’s debt-to-GDP ratio is projected to be 57.1 percent in 2015, lower only to Brazil at 66.1 percent among the so-called BRIC nations. The lowest is Russia at 16.5 percent followed by China at 19.7 percent.

GDP growth slowed to 7 percent in the April-June period, matching China’s, from the previous quarter’s 7.5 percent that was the fastest among major economies. Barclays economists expect higher government spending to boost growth, and forecast 7.8 percent expansion in the year through March.

The 51 percent drop in Brent crude in a year is helping curb inflation, increasing odds that central bank Governor Raghuram Rajan will lower interest rates for the fourth time this year. Eleven of 21 analysts in a Bloomberg survey published Aug. 25 expected the repurchase rate to be cut to 7 percent from 7.25 percent as early as this month, while the rest saw no change. 

“The scope for monetary accommodation will increase in face of slowing growth,” said Jinha Kim, the head of global fixed income at Mirae Asset Global Investments Co. in Seoul. He expects a 25 basis point cut this fiscal year.

Consumer prices rose 3.78 percent from a year earlier in July, the slowest pace in eight months and below the Reserve Bank of India’s 6 percent target by January. The shortfall in the broadest measure of trade was the smallest in seven years in the 12 months ended March. India imports about 80 percent of its oil.

“The outlook for bond markets is positive," said Nagaraj Kulkarni, senior Asia rates strategist at Standard Chartered in Singapore. “Favorable inflation dynamics will allow the central bank to ease policy and a relatively stable currency will mean foreign holdings of bonds will remain steady.”