Since the beginning of calendar year 2015, rapid disinflation owing to the fall in global crude and commodity prices has helped the Reserve Bank of India (RBI) continue its monetary accommodation with reduction in policy rates by 125 basis points (bps). One basis point is one-hundredth of a percentage point. Though RBI has substantially reduced the policy rate, yield on the 10-year benchmark government securities (G-Secs) is holding at near 7.8%. In fact, yield spread of state government securities over central G-Secs has widened from around 45 bps to 70 bps.
We believe such a trend is, in fact, justified based purely on market fundamentals with respect to demand-supply mismatch.
Consider the following. On the supply side, fiscal consolidation has ensured net dated supply at nearly the same level for the past five years (from Rs.4.36 trillion in FY12 to Rs.4.4 trillion in FY16). However, the state side story is not at all encouraging. Over the same period, this has almost doubled (from Rs.1.45 trillion in FY12 to Rs.2.78 trillion in FY16).
Supply side equation has been further complicated by the recent Uday scheme (Ujwal Discom Assurance Yojana) announcement by the government, aimed at the revival of debt-laden power distribution companies. As most of the states have agreed to its implementation, it indicates that a Rs.2.1 trillion worth of bond supply will hit the investment book by the end of FY16. Interestingly, in the current fiscal, the supply pressure has intensified and increased 35% year-on-year, a trend that will continue in FY17.
