The 10 year G-Sec yield could move towards 8-8.25% by March 2015 from about 8.7% now on the back of some measures taken by the Reserve Bank of India, yesterday, said Bank of America Merill Lynch Economist Indranil Sen Gupta in a research note today.
The RBI had hiked the FII’s on-auction G-Sec limits by $5 billion to $25 billion within the overall $ 30 billion limit for foreigners on wednesday. It had also elongated the duration of FII G-Sec investments to a minimum residual maturity of 3 years, but did not impose any lock in.
Sen Gupta said that there were a couple of takeaways from these moves.
First, he said, the RBI will likely buy the forex from FII inflows into G-Secs to recoup FX reserves. This will limit the impact on the rupee.
Second, it is trying to push FIIs towards financing of the fiscal deficit by elongating duration to a minimum residual maturity of 3 years. It had earlier barred FIIs buying T-Bills.
Third, this should flatten the yield curve by pumping in fresh demand at the relatively longer end. It will likely pull down 10 y towards 8-8.25% by March from 8.7% now.
Fourth, higher FII inflows into G-Secs will be automatically sterilised if they buy at primary auctions and reduce net RBI credit to the Centre. Finally, the RBI will continue to raise bulk FX reserves by either (1) listing G-Secs in an EM bond index to raise US$20-25 billion from benchmarked debt funds, or (2) raising sovereign or quasi sovereign debt of US$8 billion a year.