In a move that will help PSU banks deal with their NPA problem, the government will infuse Rs. 2.11 lakh crore in PSU banks enabling them to write off their bad debts and improve their capital position.
Of the total Rs.2.11 lakh crore, the government has allowed banks to raise Rs.1.35 lakh crore or 64% through bond issues. There has been a concern that the move will lead to increase the supply of new paper in the debt market. As a result, bond yields may come down due to increased supply.
We spoke to a few experts to understand the implication of this move on the debt funds.
Dwijendra Srivastava, EVP & CIO Debt, Sundaram Mutual Fund
There will be no major impact on the debt markets. This is evident from the fact the yield have come down only marginally to 6.79% from 6.80% after the government announced the bank recapitalization. It is unlikely that these bonds will be traded in open market.
In fact, there are other global events such as the volatility in crude oil prices and widening of global trade, which would affect the bond yields.
Globally, investors are gung-ho about Indian bonds due to the high real rate of return. The next few months are crucial, as the government will keep a strict check on its expenditure to maintain the projected fiscal deficit balance.
Overall, this is a welcome move, if one looks at it with a long term view. With RBI taking a hawkish stance, inflation will ideally be in the range of 4-5%, making government securities attractive.
Lakshmi Iyer, CIO-Fixed Income & Head-Products, Kotak Mahindra Mutual Fund
Firstly, issuing bonds of Rs.1.35 lakh crore will create additional supply pressure that would be negative for yields. However, the crux of the matter is the after effects of this move.
Markets are still seeking clarification on how these bonds will be structured, issued, its Statutory Liquidity Ratio (SLR) status and so on.
Looking at it from a future perspective, it is expected to mitigate losses and aid the bank balance sheet with adequate capital to lend and grow. Eventually, it will bring down the lending rates for banks.
Suyash Choudhary, Head of Fixed Income, IDFC Mutual Fund
In my opinion, there will be no impact of bank recapitalization on debt markets as these bonds may not be tradable. However, if they are tradable, the yields may go down due to adequate supply. Government is working on the modalities currently.
I would recommend investors to continue to hold dynamic bond funds as these funds can adjust to market conditions.
Vidya Bala, Head of mutual fund research, Fundsindia.com
There is not clarity on how the government plans to execute this exercise. For instance, the government may suck up liquidity if these bonds are convertible into equity.
Currently, equity and debt market are welcoming this move as it is a bold step towards revitalisation of the economy. The short to medium term impact seems good since it may improve the GDP. If a rate cut is going to support this growth, there is more reason for RBI to favour it; we may see yields coming down.
However, the long term impact cannot be predicted. The extent of its effect on the fiscal deficit, the types of instruments issued and its issuing rate will decide where yields are heading.
