10-yr G-Sec yield to trade in 7.6-8% range till Dec: Report

The yield on the benchmark 10-year government security will trade in a relatively wide range of 7.6-8 per cent till December, a report said Thursday.

The benchmark g-sec is trading at between 7.7-7.75 per cent at present, domestic rating agency Icra said.

It said the yield will be influenced by various factors including crude oil prices, the evolving balance of various fiscal risks, likelihood of revision in governments market borrowing in Q4, magnitude of open market operations, trend in FPI flows and the rupee, and global interest rates.

In the report, the agency said price of the Indian crude oil basket is likely to remain considerably lower in the immediate term than the average of USD 80 per barrel in October 2018.

It attributed this expectation to factors like exemptions from US sanctions on Iran for India and seven other jurisdictions.

However, factors like supply-demand balances, the evolving scenario related to geopolitical developments, and the extent of concerns regarding the impact of trade wars on global growth would impart volatility to crude prices and also the outlook for bond yields, it said.

The cool-off in headline inflation to 3.31 per cent in October will result in a status quo in rates from RBI, despite the shift to calibrated tightening at the last bi-monthly review in October, it said.

The Reserve Bank of India (RBI) will continue to conduct open market operations (OMO) with three weekly auctions of Rs 100 billion each in December, bringing the total magnitude of the bond buybacks to Rs 1.6 trillion that should have a dampening effect on the yields, it said.

Further OMO announcements by the RBI in Q4FY19 are likely to be contingent on the increase in currency with the public (CWP) and forex intervention, it said.

The size of planned G-Sec issuance for FY19 has been pared from the budgeted level, and officials have reiterated that a fiscal slippage in FY19 would be avoided, but various fiscal risks persist, which the markets would continue to monitor, it said.

If the market expects an upward revision in the g-sec issuance for Q4FY19, it would push up yields towards the end of the December quarter, it said.

In case of the threat of trade wars de-escalating further, and once the US markets start to price in two to three rate hikes for 2019, the US 10-year yield may rise above 3.3 per cent, which may result in some hardening of g-sec yields as well, it said.