Bonds, Currencies & Commodities
Bond markets not taking talks of PSU divestment at face value

Apprehensive of high government borrowings and widening fiscal deficit, bond markets are looking for some respite from PSU divestment funds but see no chance of yields falling significantly

Talks of the government’s burgeoning fiscal deficit have now reached a high pitch, giving vent to speculation on the direction of interest rates and bond yields. The government’s dose of fiscal and monetary stimulus measures, to revive an economy caught in the clutches of a global slowdown, have come somewhat at a cost. Now, with economic recovery slowly taking a more visible shape, the government has already given indications of withdrawing its supportive monetary stance in favour of a tighter, more aggressive interest rate regime.

In the midst of all this, the bond market has been waging a losing battle versus a euphoric equity market; it fears piling government borrowings and fears of monetary tightening. Bond markets have come under pressure because of the government’s borrowing habits. Yields on 10-year government securities (G-Secs) had almost touched 7.5%. The government’s talk of PSU divestment had come as a respite. However, there is still a degree of uncertainty regarding the government’s action in this regard. In an earlier interview with Moneylife, K V Kamath, chairman, ICICI Bank Ltd, had said, “The government is not articulating the wealth we have mainly in the form of public sector investments. Once the government hints that even a small part of this wealth can be monetised, nobody will then talk of deficit.”
Now that the government has articulated precisely that by sending equities higher, why are bond traders not at ease? Speaking exclusively to Moneylife, RVS Sridhar, senior vice president, treasury head, markets of Axis Bank, said, “In the first place, there was no target worth mentioning in the divestment space. A paltry Rs1,000 crore was budgeted and they have already achieved much more than that. This particular intention of selling these PSUs in smaller or larger tranches has been there for many years. I think today the government is coming out with a more comprehensive strategy, saying they will amass several tens of thousands of crores. I think they can deliver at least to some extent. So it could definitely lead to infusion of funds into the system, and thereby help to reduce the pressure on the bond market.” However, the bond market was being cautious on this front. He added, “Even in the case of 3G spectrum auction, it is not something which is taken seriously by the markets. We have seen that it has been postponed twice.

Now hopefully it will happen within the financial year. Some of these issues are not entirely easy to follow through. Making a statement of intent to sell some shares of a PSU is one thing. Pulling it off in large numbers is another matter, because these are under public scrutiny. There is a process of arriving at a consensus and then coming to a decision. It is a long process. What the bond market does not have today is 100% confidence that this money will come within the financial year. Yes, on the equity side we have seen better numbers than what was estimated. On the 3G side we are feeling more confident that the money will come at least before March. But again, how much will come is still an uncertainty.”
Mr Sridhar said that the RBI’s stance in the past four-five months signalled a call to reality. He explained, “We have realised that so much of liquidity in the system may not prove beneficial to the asset markets, like real estate, commodities and equity. The surplus liquidity lying around may get into these markets and we might have a sort of asset price inflation. Central banks of economies who have escaped the worst effects of the aftermath, are now considering whether to continue with stimulus measures, monetary or fiscal, or whether to correct it, so that we don’t get such a situation. In that sense, clearly signals have been given to the market. Along with that, the fear that inflation is rising has become a reality. Concerns have been expressed that we should not lower our guard, but actually bring back our guard. RBI’s statements convey to the debt markets in no uncertain terms that they should be on their guard, and hence the first reaction would come from the G-Sec market. Central banks may not always act through measures; they can act through statements and indicators. So the impact on G-Sec yields can only be negative as we go along.”
According to him, yields are going up because one is not investing for the sake of selling tomorrow. “We are forced to hold these papers because these are part of statutory liquidity reserve (SLR) requirement. The government does not issue papers of short duration; it issues papers of 10, 15, 20 or 30-year duration. So when interest rates go up, we demand a price for the future as well. And as inflation expectations have gone up, RBI cannot stay away from hiking rates. If it hikes rates, what would happen to our cost of funding and G-Sec yields at that time? So markets make estimations. I think there is no chance of G-Sec yields falling significantly,”  added Mr Sridhar.
Sanket Dhanorkar [email protected]


Corporate bond yields slump on surplus liquidity

Falling yields on government bonds are being mirrored by the corporate bond segment, as sluggish credit growth and low interest rates lead to oversupply of money

The Reserve Bank of India (RBI) has shied away from hiking interest rates, largely because credit growth has failed to match up to its expectations. During November, the resulting surplus cash lying with the banking system has contributed to the decline in corporate bond yields which have slumped by 30-50 basis points to their lowest in nearly 3.5 months. The yield on the Reuters benchmark five-year corporate bond ended at 8.07% on Friday, the lowest since 30th July.

RVS Sridhar, senior vice president for treasury at Axis Bank explained, “Bond yields are falling as a result of the relief rally, post the RBI's monetary policy review, as no rate hikes have been carried out. The hike in statutory liquidity reserve (SLR) led to a bullish rally on potential increase in demand which has fed into the bond segment too. Availability of sufficient liquidity amid lack of credit growth has led to a rally and credit spreads have shrunk.”
“Indian banks are waiting for disbursement to happen but actual disbursement is not picking up. RBI has not tightened the money supply and has not increased the rate to ensure good economic growth; all these factors resulted in excess liquidity in the market,” said Gautam Jain, senior analyst, RBS Equities.
“When current interest rate is lower than coupon rate of corporate bonds, the value of bond goes up more than the face value (as there would be more demand for higher coupon rate bond) and when the bond value is more than the face value, yield goes down as the holder of a corporate bond will be getting same coupon rate of interest on higher value of bond,” Mr Jain added.
According to RBI data, total bank credit since January increased a mere 9.8% over the corresponding period last year. In comparison, credit off-take registered a robust 27.7% growth during the same period last year. This has caused RBI to revise its credit growth target to 18% from 20% earlier this year.
Speaking on future movements in bond yields, Mr Sridhar said, “In the short term I believe the rally would be sustained until we see any concerns from RBI or inflation concerns. The rally may end in December as markets prepare for the January monetary policy review.”

Mr Jain opined, “I think, till December 2009 end, it is likely to remain at this level and from January 2010 onwards, it should move up. RBI may increase the interest rate to tackle inflation in their 10th January policy meet. There would be a pick-up in credit growth as normally credit grows well in the last quarter. Hence, I think from January-February onwards the bond yield should start moving up marginally.” – Sanket Dhanorkar [email protected]


‘Real estate prices are bound to come down from November’

Pankaj Kapoor is the founder of Liases Foras, a real estate research firm. He tells Moneylife that property prices are bound to fall because they have again become unaffordable

ML: What is your view on the increasing prices of residential properties? Do you feel that market sentiments have improved?
From November onwards you will again see a drop in price of properties by 15%-20% as the developers have lot of inventories and on top of that they are increasing the prices, encouraged by a more buoyant market.

ML: How much of residential inventories are piled up across six cities (Mumbai, NCR Delhi, Bengaluru, Pune, Chennai and Hyderabad) in India? Do you think they will increase in Q2 FY10?
In the last quarter (Q1 FY10) unsold inventories in six cities (Mumbai, NCR Delhi, Bengaluru, Pune, Chennai and Hyderabad) were about 282,999 units or 34 crore sq ft. This includes as many as 68,000 units unsold in Mumbai; 70,000 in National Capital Region of Delhi (NCR); 48,000 in Bengaluru; 44,000 in Pune; 21,000 in Chennai and 32,000 in Hyderabad. I think the figures will increase by approximately 20% in Q2 FY10. Till the time the developers do not bring down the prices, properties are not going to sell.

ML: Why are the developers raising prices if so much of inventories are still left with them?
Real estate developers are ramping up the property prices in order to get higher valuation as many of them have planned an initial public offering (IPO). It is all part of a gameplan. During the slowdown from October 2008 all developers had gradually reduced their property prices by 30%. This revived the sector a bit. Initially builders hiked prices by 5%-10% just to signal the bottom and get potential buyers to stop waiting for a further decline. As the builders saw demand coming in the market, they hiked up the prices once again for higher valuation and they have killed the market.

ML: During Dushera to Diwali most developers launch new projects. How many were being launched across six cities by the developers during the last festive season?
In Pune, around 200 new projects have been further launched between June 2009-September 2009. We are foreseeing the same kind of situation across the six cities.

ML: What was the price at which properties got sold and what are the prices at which the left over properties are available for sale in Mumbai?
In Mumbai, properties beyond Borivali, were selling at Rs 2,000 per sq ft. The left over properties were priced at Rs 2,800 per sqft. In central Mumbai properties sold at the bottom at Rs 13,475 per sq ft and but the left over properties are now priced at Rs 24,950 per sq ft.

ML: Do you think the developers will reduce the prices of the properties?
Yes. There is still a huge gap between affordability and availability. Before the balloon could have burst it is blown again. It has happened in China, Japan and even in India.

ML: Are the developers trying to short change buyers by adding too much of a load to the carpet area?
Developers are offering properties on a super built-up area basis which is beyond 50% added to the carpet area. Builders have inflated figures for super built-up area. None of the builders are ready to sell on a carpet area basis. If a developer offers you 1,600 sq ft area then 800 sq ft is the actual area of the flat and the rest are the common amenities. In 2000, the super built-up area used to range between 18%-20% above the carpet area. Then in 2004 it was 35%; in 2005 it went up to 40%; in 2006 it went up again to 45% and after 2008 it is beyond 50%. It should be made mandatory to sell by the carpet area rate basis and strict laws are required to stop this. Government and banks are now coming together and are planning to make this rule (selling on carpet area basis) compulsory for all developers.
— Pallabika Ganguly [email protected]




Sharad Gaud

4 years ago

If the Builders will sell at carpet area and since the loading today is at 50 % then the prices will escalate and they will try to adjust the rate at carpet area so any ways the builders will make money and the situation will be same...


7 years ago

i am planning to buy plot near hinjewadi in pune will be good investment to buy now or shall i wait

K c Sarma

7 years ago

you predicted fall of 10-15% from nov-2009 but today in march 2010 proerty in mumbai increased to 30-40% +
Now the ground is prepared for bubble burst.

s.b jain

8 years ago

Under NGO pressure, The Govt. of Maharashtra has issued an ordinance for all real estate prices to be only quoted only on carpet area. But so far it has not been gazetted / notified due to the Builder lobby's payoffs. NGO's must immediately demand that this be gazetted / notified.
I compliment Mr Kapoor for his forthrightness.
Property is a derived demand and prices have to ultimately relate to the general net income & wage level in the market. Artificially low Interest rates & abnormal liquidity are what screw up the market for real demand as consumers are easily lured into overleveraging themselves which sets up its own consequences. In my view prices need to fall at least 50 % if not more for a stable long term equilibrium!!!

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