Experts see 2019 a good year for bond markets, but mixed for rupee

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The year 2019 could again be a volatile year for the rupee, but the bond market could breathe easy as the Reserve Bank of India (RBI) seems to be willing to support the market with liquidity and rate cuts. 

The market is already factoring in a rate cut in February, and there could be more in the coming days. The central bank has already committed to hike its liquidity support for the market by hiking December’s open market operation (OMO), under which it buys bonds from the market, by an additional Rs 100 billion, as well as planning to buy Rs 500 billion of bonds in January. Such support will continue at least till March, it communicated. 

Thus, the liquidity support for the whole of fiscal 2018-19 works out to about Rs 2.5 trillion, a massive boost that would put the system in a surplus mode, from deficit of Rs 1 trillion plus. 

This move will definitely support bonds and could take the yields down to 7.10 per cent level, from the present 7.3 per cent. “Given the fact that inflation levels are way below RBI’s threshold and also with oil and food prices looking quite low, yields should continue to hunt for slightly lower levels,” says Harihar Krishnamurthy, head of treasury at First Rand Bank.  

“The ten year yield may fall less compared to one year. Market hopes of a rate cut in February or April should keep the mood positive. If foreign portfolio investors’ (FPIs’) appetite comes back on the back of lower US yields, it will be another positive,” Krishnamurthy says, adding that the market will eventually want to look into the Budget math post general elections that would determine yield trajectory going forward.

However, major central banks in the US, the EU, the UK and Japan will also normalise their balance sheets, which will drain out liquidity and push up global yields. Indian yields will surely get influenced by it. 

For the rupee, which depreciated 8.7 per cent in 2018, it could be a difficult year as geopolitical uncertainties still loom large. The dollar may flip-flop, impacting emerging markets currencies too. Local equity flows would directly influence the exchange rate. 

“We expect the rupee to be in the range of 69 to 76 a dollar with a bearish bias. We may see significant correction in equity markets since markets in India normally react after a gap in the US as seen historically. Additionally, we see risk aversion stemming due to global tensions, bearish equities and overall growth slowdown,” said Abhishek Goenka, managing director and CEO of IFA Global.  The world has also not seen the end of trade wars and a renewed currency war could be in the offing. If there is a persistent pressure on exchange rate, the RBI will be forced to increase its policy rates. 

“Rupee weakness will be driven by a global slowdown and financial market stress, trade war and Chinese currency depreciation, FPI outflow from India amongst other emerging markets, and due to policy normalisation by the EU and the US,” said Samir Lodha, managing director, QuantArt Markets Solution. 

“Indian markets’ immunity remains low to any external shocks because of weak banking sector, ailing corporate balance sheet, political uncertainty and cost,” Lodha said, adding the rupee could test new low of 78 a dollar in 2019 because of the above factors.

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