Standard Chartered Bank has recommended 'buy' on government securities (G-Secs) , citing attractive valuations amid expectations that the Reserve Bank of India (RBI) would hold rates in its next policy review, providing a stable monetary policy environment.
It also revised its outlook on G-Secs to 'positive' from 'neutral' on improving inflation dynamics, expectations of stable policy rates, attractive valuations and a favourable demand-supply balance in Q4.
"If our inflation expectations are met, we believe the RBI is unlikely to hike the repo rate at its 28 January policy meeting," StanChart said in a report.
With the policy rate expected to remain stable at 7.75 per cent, government securities valuations are attractive, the report said, adding that StanChart recommends buying 5-year government bonds (7.28 per cent-2019) at 8.90 per cent with a target at 8.55 per cent.
StanChart also revised its December consumer price and wholesale price inflation forecasts to 10 per cent and 6.95 per cent from earlier estimate of 10.4 per cent and 7-7.25 per cent respectively, based on the reduction in vegetable prices during the first two weeks of the last month.
The report expects the demand-supply balance to turn favourable in Q4 on a significant drop in government bond supply and the likelihood of only limited fiscal slippage.
The monthly average net government bonds supply in Q4 (January-March, 2013-14) is only Rs 16,600 crore, which is significantly lower than the Rs 55,000 crore in Q3, it said.
"While we expect limited fiscal slippage (at 5 per cent of GDP against the budgeted 4.8 per cent), we believe the government is unlikely to announce additional market borrowings to fund this slippage," the report said.
StanChart believes that fears of significant debt outflows due to the US Fed's tapering have reduced substantially as for the first time since May 2013, debt FIIs were net buyers of bonds, worth $863 million in December 2013.
"We think the rupee is also supported by the improvement in external sector dynamics and a sharp correction in CAD. This should provide comfort to FIIs and reduce the risk of further outflows from Gilts," the report said.