BE CAUTIOUS AHEAD OF SPATE OF ELECTIONS

India's domestic markets have traded on a strong note in 2017, but of late there is a sense of underlying unease, Singapore's DBS Bank said today. While the equity markets and rupee have held their ground, the "cautious mood" is most palpable in the debt markets, the multinational banking and financial services corporation said in a daily market report. DBS noted that 10-year bond yields climbed for a fifth consecutive month into December (6.5 per cent in June 2017 to over 7.2 per cent in December -– one-and-a-half-year highs), with momentum strengthening due to a confluence of unfavourable factors on both the demand and supply front. In the immediate term, some consolidation at highs is likely as much of the negativity has been priced in, it observed. Eyes are on upcoming event risks -- two state election results due on 18 December (stakes are higher in Gujarat), the winter parliament session, November trade numbers, and fiscal developments, which will dictate near-term action, believes DBS. "Beyond that, factoring in the recent sell-off and the likelihood of a weaker macro profile, we see reason to be cautious, nudging up our yield forecasts for the year ahead," the report stated. Beyond this year, five states go the polls in 2018, and five more until the General Elections in the first half of 2019. The crucial states are Rajasthan, Karnataka, and Madhya Pradesh, with a bigger weight in the Upper House of Parliament, it added. The ruling Bharatiya Janata Party's performance in the upcoming state polls will serve as a litmus test of its popularity considering recent policy changes and reforms, particularly the Goods and Services Tax (GST), the bank said. Overall, risks are building on the horizon, muddied by the rise in commodity prices. Despite this modest deterioration, it is amply clear that the metrics are still in a far better shape than in 2013. The bond issuance calendar will be busy for the December 2017 quarter, but is expected to ease off into January-March 2018. In the face of surging yields, the authorities deferred some issuance, conducted debt repurchases, and raised limits for foreign portfolio debt interests (FPI), which has provided temporary relief from the supply end. "We have nudged up our yield forecasts for India government bonds and now expect 2-year and 10-year yields to touch 6.6 per cent and 7.5 per cent by end-2018," said DBS. "Ten-year yields have risen by more than 50 bps since end-September as the market gravitates to our view that fundamentals (rising price pressures and a widening current account deficit) have become a lot less conducive for bonds. "Notably, headline inflation rose 4.9 per cent year-on- year (against consensus estimates of a 4.3 per cent rise) in November, further supporting our case that a modest rate hike cycle may be poised to begin in 2019," it said.