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A supply glut is set to hit India’s government bond market, and drive benchmark yields toward 8 per cent by year-end, according to Standard Chartered Plc.

The lender estimates that excess supply of sovereign and state debt may total as much as Rs 6.3 trillion ($81 billion) this fiscal year. That’s likely to further upset a market that’s struggling to cope with rising interest rates and dwindling surplus liquidity, said Parul Mittal Sinha, head of India financial markets at the bank.

“It may keep becoming incrementally more difficult for supply to be absorbed by the market,” said Sinha, who has spent more than a decade trading currencies and rates in London, Singapore and Mumbai. “Supply worries will increase from July and with interest rates normalizing to a higher trajectory and liquidity surplus decreasing –- all these three factors can come together.”

Rupee bonds have maintained a semblance of stability amid the selloff in global debt, with recent auctions drawing decent demand as the central bank vowed to ensure the orderly completion of the government’s borrowing program. Still, there are signs that the calm may be shattered after benchmark 10-yields soared to the highest since 2019 last week.

Indian authorities are looking to sell a record Rs 14.3 trillion of bonds this fiscal year as they boost spending to spur growth while tax cuts erode public revenue. To make matters worse, the central bank is expected to hike rates further after 90 basis points of increases in the last two meetings while also mopping up excess liquidity to tame prices that are running above its target band.

StanChart estimates that excess bond supply may total between Rs 3.8 trillion to Rs 6.3 trillion this fiscal year, according to a June 8 note.

All these negatives have fueled a six-month drop in benchmark 10-year debt, and analysts at Citigroup Inc. are among those who predict that yields may climb as high as 8 per cent from around 7.48 per cent now. They last reached 8 per cent in 2018.

Bear Flattening

The yield curve is likely to continue bear flattening, with shorter yields rising faster than longer rates, according to Sinha.

“As more and more hikes get delivered, the five-year part of the curve will remain under pressure,” said Sinha. “The longer end demand is growing at a good pace -- the 15- to 30-year part of the curve remains well-anchored with demand from insurance companies.”

Local investors who were sitting on excess cash have deployed some funds after yields climbed to the highest in over three years, said Sinha. She added that the RBI was unlikely to carry out another major bond purchase program like it did in the previous fiscal year, when it bought Rs 2.2 trillion of debt.

“We are not in the camp that expects any big bond purchases from the RBI,” said Sinha. “If inflation cools down and big rate hikes don’t happen, you won’t anyways need to do that kind of intervention.”

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The ongoing downturn in the domestic stock market has seen nearly 83 percent of the stocks forming the Nifty 500 index, a collection of the biggest companies in the country, deliver flat or negative returns in 2022 so far.

Many of these stocks are hovering below their 52-week lows and their 200-day moving average (DMA), data compiled by Moneycontrol showed.

So far this year, the Nifty 500 index lost 12 percent, while the BSE Sensex and Nifty 50 have declined nearly 10 percent each.

Companies that have seen the most erosion in their stock prices since the start of this year include Dhani Services, Solara Active Pharma, Brightcom Group, Indiabulls Real Estate, Metropolis Healthcare, Hikal, Indiabulls Housing Finance, Dilip Buildcon, Welspun India, Nazara Tech, One97 Communications, Zomato and Sterlite Tech, which have lost 40-80 percent.

Nifty 50 stocks such as Hindalco Industries, Tata Steel, BPCL, IndusInd Bank, Shree Cement, HDFC Bank, Asian Paints, Wipro, Infosys, HDFC, HCL Technologies, Bajaj Finance, Tata Consultancy Services, Tech Mahindra, and Grasim Industries hit one-year lows recently. All these stocks are down between 8-40 percent this year.

"The broader market has been under pressure mainly due to the heavy FII selling. Concerns of premium valuation and higher impact of inflation on their profitability led to sharper fall in broader markets" said Sneha Poddar, AVP, Research Analyst, Broking and Distribution, MOFSL

However, the sharp correction in the market is also being seen as an opportunity by some market participants.

“I think it's the right time for long-term investors to add to good growth stocks, which are available at attractive valuations,” Narendra Solanki, Head-Equity Research (Fundamental), Anand Rathi Shares & Stock Brokers, said.

Solanki believes investors should continue to hold existing stocks in their portfolios, if growth prospects of the company are intact as the “current volatility is more in the short-to-medium term, while long-term prospects for our economy remain promising”.

Analysts attribute the negative or low returns in some popular consumer durables, auto, banking, realty and metal stocks that are actively traded in futures and options (F&O) on the perception that higher cost of borrowing and product prices will hurt demand at a time when companies are grappling with persistently high input prices.

Metal stocks have already been under pressure since the government’s decision to impose export duty on steel to cool domestic prices.

Among IT stocks, volatility in the global markets amid higher inflation and expectations of tightening by central banks, along with the Russia-Ukraine war, which is unlikely to end soon, may see a slowdown in order books. Most Indian IT companies are moving their operations out of Russia, while helping clients maintain business continuity by shifting work to other locations. This is likely to increase margin pressures further, analysts said.

Oil & gas stocks were under pressure as investors feared that interest rate hikes from major central banks could slow the global economy and cut demand for energy.

Vikram Kasat, Head-Advisory at Prabhudas Lilladher expects markets to remain volatile for the next three months as he believes inflation is likely to remain high and geo political tensions will not end soon.

"We believe that inflation expectations have run ahead of themselves and the scaling back of consumption through increasing interest rates and tightening liquidity would result in inflation softening. However, markets have typically moved either sideways or down during this process. Nifty is also currently trading at 19x forward assuming a 10 percent cut in earnings, which does not give a screaming ‘buy’ yet,” said Vinit Bolinjkar, Head of Research, Ventura Securities.

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