The Indian government has lined up a massive Rs.288,000 crore borrowing program for the first half of 2018-19. This is not only lower than the original estimate but is also likely to be of a lower duration. The Finance Ministry official met bond traders last week to gauge the appetite for bonds when the government sets off its aggressive borrowing program. However, the institutional appetite at this time appears to be quite weak. Domestic appetite had been hit by rising bond yields while global appetite for bonds will be on the sidelines to gauge the yield differential between India and the US.
Even as the Binani Cement deal has been running into a controversy, there is a new controversy that has erupted around the Essar bid. While Arcelor Mittal has questioned the sanctity of the process adopted by the NCLT, JSW Steel’s Sajjan Jindal has confirmed that they were prevented from re-bidding for Essar Steel by the lenders. Interestingly, both Numetal and Arcelor had emerged as the best bidders but both the bids were rejected due to technical reasons. Like in case of the Ultratech bid for Binani Cement, JSW was also willing to pay a higher price for Essar Steel. JSW lost out to Tata Steel on Bhushan bid.
J P Morgan’s Sajjid Chenoy has affirmed that Indian bond markets may be caught in a web of uncertainty for some more time. Chenoy calls it the fiscal trilemma for bond markets. Firstly, the RBI has reduced the bank’s appetite for bonds by consistently bringing down the statutory liquidity ratio (SLR). Secondly, most banks are likely to become vulnerable to huge MTM losses on their bond portfolios and the first signs were already visible when SBI announced its quarterly results for December. Thirdly, the government continues to be wary of FPI investment in bonds and that is creating the logjam.
The government continues to focus on forced intra-sector mergers and acquisitions of companies to overcome the bad loan risks. After implementing the idea in the hydrocarbons sector, the next target appears to be the stressed power sector. The government proposes to form a consortium of NTPC with the two largest power financiers (PFC and REC) to bid for stressed power assets across India. The total loans to the power sector are currently to the tune of Rs.5.60 lakh crore ($85 billion) with around 34 stressed power plants with an outstanding loan liability of Rs.174,000 crore.
After a brief respite in crude oil prices down to $65/bbl, Brent crude again jumped to the $70/bbl level as Middle East tensions escalated after Saudi Arabia had to intercept a series of missiles allegedly fired by Houthi rebels in Yemen. The neighbouring country of Yemen has been under consistent attack from Saudi Arabia and Saudi Arabia has been alleging that Iran had been funding these Houthi rebels in Yemen to give a tough time to Saudi Arabia. This sharp rise in prices happened despite a rise in the number of working shale oil rigs in the United States. It may be however quite early to get worried about crude oil prices. Trump’s trade war is expected to result in a slowdown in industrial demand which could depress oil demand and pull prices down. That will be good news for India.
In a surprising move, the Sensex bounced by nearly 470 points on Monday looking almost like a mirror image of the sharp fall on Friday. In terms of data flows, the major data points this week will include US GDP data and Indian fiscal deficit data. In addition, the auto numbers for March, the PMI manufacturing and the lag effects of LTCG tax will impact Indian markets. The sharp rise in markets on Monday largely appeared to be an outcome of short covering ahead of the F&O settlement this week. The sharp bounce was led by PSU and private banks while IT continued to lag the index.
