Economy: 1HFY19 govt borrowing: bundle of joy for now - Kotak

1HFY19 borrowing: bundle of joy for now. The1HFY19 gross borrowing at Rs2.88 tn, along with realignment of issuances at extreme lower and higher end of the curve, will cheer the bond market in the near-term. Lighter supply may push the 10-yr yield to 7.20-7.50% range in 1HFY19. However, we will watch for evolving risks in 2HFY19 in the form of heavier supply, precarious fiscal and inflation situation, and consequent reaction of the RBI. Our base case is for RBI to be on a pause in FY2019.

1HFY19 borrowing springs positive surprises

The 1HFY19 government borrowing calendar surprised the market positively with its quantum, tenure and nature of the borrowing. Overall FY2019 gross borrowing via dated bonds has been reduced by Rs500 bn to now Rs5.56 tn, with government increasing its funding requirement through the NSSF by additional Rs250 bn and also reducing its buyback plan by Rs250 bn. Out of that, Rs2.88 tn will be issued in 1HFY19, implying ~51.8% of the revised FY2019 gross borrowing, as against the usual front-loading pattern of ~60-65%. 1HFY18 had seen Rs3.72 tn of gross issuances, ~64% of total gross borrowing. The net issuance for 1HFY19 would be ~Rs2.0 tn as against Rs2.32 tn in1HFY18, while the revised FY2019 net borrowing would be Rs4.12 tn and Rs 3.65 tn if adjusted for buybacks.1QFY19 would also see gross short-term borrowing through T-bills at Rs1.95 tn (net Rs420 bn). Of this, 91-day,182-day and 364-day bills would respectively account for Rs910 bn, Rs520 bn and Rs520 bn.

Gsec issuance profile sees a new entrant in 1-4 year bracket

The weekly dated securities auctions size will be Rs120 bn (Rs150-180 bn in 1HFY18), evenly distributed between 24 weeks. The bigger takeaway however was the reduction in concentration of supply in belly of the curve (10-14 year segment) to 29.2% of 1HFY19 gross borrowing from ~52% in 1HFY18. The supply at the short end of the curve has increased, with a new 1-4 year segment bearing ~8.3% of the total 1HFY19 issuances. The extreme long end of 20yr+ segment also sees 22.6% of total issuances (as against ~14% in 1HFY18). Around 10% of the issuance will be of Floating rate bonds and CPI indexed bonds. Clearly the government reckons the present lack of appetite for duration bonds by banks and has accordingly realigned its issuance profile to meet the current demand dynamics. Meanwhile, the WMA limits remain unchanged at Rs600 bn and Rs700 bn for 1QFY19 and 2QFY19 each.

Bonds to heave a sigh of relief for now, but watch out for risks

The borrowing announcement will bring much needed cheer to the bond market which has been saddled with negative sentiments. The CMB issuances (Rs1tn budgeted) will likely take care of redemption pressure and any revenue-expenditure mismatches in 1HFY19. Lighter supply (skewed at shorter end) will imply bull flattening of the curve in the near term. The benchmark 10-yr paper will likely trade in 7.20-7.50% range in 1HFY19, after ending FY2018 at ~7.40%. The enhancement of FPI limits in early April could further act as a catalyst. The bond rally will benefit banks as it will lead to lower MTM provisions on AFS investment book. PSU banks will benefit relatively more due to higher duration compared to private banks.

However, possible risks may emerge in 2HFY19 which could pressurize the bond yields again: (1) the higher-than-usual 2H borrowing (~48% of total) during the busy credit season; (2) possible shortfall in NSSF; (3) risk of fiscal slippage if GST revenues show weaker trend in 1HFY19, implying risk of higher borrowings. Our expectation of FY2019 GFD/GDP at 3.5% as against budgeted 3.3% would mean ~Rs200-230 bn of additional market borrowings; (4) RBI's reaction function keeping in mind the evolving dynamics of inflation, growth, fiscal, oil and global rates.

Source : Equity Bulls

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