Gold Silver Reports — Foreign debt investors who were headed to the exit gate this year may be returning and may even end up being net buyers of bonds as the biggest economic reform in more than a decade, the Goods and Services Tax, appears to be closer to reality than ever .
The passage of the GST Bill will set the stage for improved business conditions and progressively higher tax revenues. The fiscal deficit commitment also gives scope for easing of borrowing pressure in future, say investors. That central banks in developed world are likely to remain committed to easy monetary policy would make the 7% yields along with a stable currency an attractive investment proposition .
In the past one month, benchmark bond yield dipped 28 basis points or 3.75% pushing prices up. On Friday, it closed at 7.17%, the 38-month low.The optimism is captured in the ` . 1.4 lakh turnover in government bonds trading on Thursday .
“Amid several positive developments on governance and economics such as GST, monsoon….Indian debt markets will continue to attract overseas investment for the rest of the year, setting new trends,“ said Vijayan Subramani, managing director, DBS Bank. “The falling bond yields are indicative of that. The government is earning credibility from investors .“
July recorded the highest monthly overseas funds inflow into Indian bonds at ` . 6,845 crore of bonds, the highest since October 2015. At an aggregate level, they are net sellers of ` . 4,724 crore this year. The government has said it would place the GST Bill in the Rajya Sabha this week which gives hopes that the tax proposal that unifies India as one market would at last become a reality after more than a decade of bickering .
“GST is an important input in helping accelerate the investment cycle,“ said Srinivas Varadarajan, head of fixed income & currencies (India), Deutsche Bank. “Over a long period, GST will enhance growth. To that extent it should help go vernment finances and strengthen the cause for a reduction in structural fiscal deficit. It will have a positive impact through lower borrowings . “
In the 2016-17 Budget, the government pegged its total gross market borrowing at ` . 6 lakh crore by selling bonds through RBI while aiming its fiscal deficit at 3.5% of gross domestic product. Both stand to improve in the coming years. In corporate bonds, they have used up about 66% of the total limit pegged at ` . 1.62 lakh crore. FPIs have exhausted 86% of their investment total limit in government debt securities at ` . 1.83 lakh crore .
Furthermore, with yields on government bonds in developed countries like Japan and Germany going negative, Indian yields remain attractive. “We would expect global central banks to continue with their easy monetary policies (low interest rates and QEs) even as governments expand their fiscal spending to increase aggregate demand,“ says Sanjeev Prasad of Kotak Institutional Equities in a note . — Neal Bhai Reports