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Higher central debt issuance in FY12 likely to be overhang on long yields
● Our economist in the recently published note on FY12 budget
preview, published on 21 Feb, estimates FY12 central government
fiscal deficit to rise to 5.5% (versus 4.7% in FY11). On the back of
this, they expect the central government market borrowing
requirement to rise about 30%YoY to a high at Rs4.3 tn in FY12.
● We believe this magnitude of government borrowing will put an
additional strain on domestic liquidity as even assuming an 18%
deposit growth in FY12, this would translate to about 46% of
incremental deposits. While the borrowing requirements have
been running at a high 40-60% of incremental deposits since
FY09 (versus FY03-08 average of 30%), this were supported by
central bank monetising part of the deficit. Given the high inflation,
we expect Central Bank’s ability to monetise the deficit to be
limited.
● With liquidity likely to remain strained even in FY12, we expect the
upward pressure on interest rates to continue next year.
Moreover, the large supply of government bonds will put a sharp
upward pressure on domestic long bond yields that have over the
past few months surprisingly not yet reacted to the move up in
domestic rates or caught up with the recent rise in global yields.
● While banks over the past few years have reduced the share of
investments in the AFS portfolio, the potential MTM hits are still
significant at about 5-15% of earnings for a 100 bp rise in rates.
BOI, SBI and Union Bank are the most vulnerable, given the
relatively longer duration of their investment portfolios. We
continue to prefer retail-funded franchises (HDFC Bank, ICICI )
that have lower leverage to bond yield rise in this environment.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Higher central debt issuance in FY12 likely to be overhang on long yields
● Our economist in the recently published note on FY12 budget
preview, published on 21 Feb, estimates FY12 central government
fiscal deficit to rise to 5.5% (versus 4.7% in FY11). On the back of
this, they expect the central government market borrowing
requirement to rise about 30%YoY to a high at Rs4.3 tn in FY12.
● We believe this magnitude of government borrowing will put an
additional strain on domestic liquidity as even assuming an 18%
deposit growth in FY12, this would translate to about 46% of
incremental deposits. While the borrowing requirements have
been running at a high 40-60% of incremental deposits since
FY09 (versus FY03-08 average of 30%), this were supported by
central bank monetising part of the deficit. Given the high inflation,
we expect Central Bank’s ability to monetise the deficit to be
limited.
● With liquidity likely to remain strained even in FY12, we expect the
upward pressure on interest rates to continue next year.
Moreover, the large supply of government bonds will put a sharp
upward pressure on domestic long bond yields that have over the
past few months surprisingly not yet reacted to the move up in
domestic rates or caught up with the recent rise in global yields.
● While banks over the past few years have reduced the share of
investments in the AFS portfolio, the potential MTM hits are still
significant at about 5-15% of earnings for a 100 bp rise in rates.
BOI, SBI and Union Bank are the most vulnerable, given the
relatively longer duration of their investment portfolios. We
continue to prefer retail-funded franchises (HDFC Bank, ICICI )
that have lower leverage to bond yield rise in this environment.
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