There are three and half Fundamental reasons Why Indian Bonds will find lower over the next two years.

1. The supply side will dominate the fiscal policy in India now. India is going to operate its fiscal policy differently and it will have a huge implication on inflation.

2. Budget was a bond budget in real terms. The fiscal deficit is 5.1% more than FD. A significant cut on PSU borrowing. (IEBR led) and small saving funding. So it looks like 3% FD.

3. Demographics and income have entered the lane that gives long-term savings. (Insurance / Pension/PPF) who have to buy nearly 2.5% of the GDP worth of SOV bonds. That number will continue to rise over the next two decades.

3.5. As the Indian banking system moved from SLR-based to LCR one over the past decade. We had a systematic headwind on bonds. In all rallies, banks were sellers because they had room to empty excess SLR but now banks need to buy 2% of GDP worth bonds every year to meet their LCR requirement.

Net demand = banks 2% + Investors 2.5% + FII 0.5% + some other 0.5% (% of GDP)

Net Supply = 5.25% of GDP (State & central Bonds)

Lower IRBR borrowing.

We will see bonds lower than COVID loss in the next 2 years.

Time to long bonds through mutual funds.

Note: We are actively playing this strategy for our clients.

A blog from Santosh G Akerkar.
For Educational and Awareness purposes.