BofA: Steady Fiscal Consolidation; 5y Bonds Best Place

Bank of America write “the upcoming budget is expected to project further fiscal consolidation at a slow pace, which would be enough to keep nominal deficit and issuance requirements stable vs last year.”

• “Duration supply would still be ample compared with the usual absorptive capacity of the domestic investor base. However, we expect demand for bonds to be much stronger in the next fiscal year on a) easing expectations b) banking system liquidity and c) foreign inflows backed by both passive indexed flows and active carry flows into IGBs.”
• “Prospects of inclusion by other indices is likely to pick-up again towards 4Q and may further add to these flows. INR remains well-supported on portfolio inflows, but INR gains are likely to be limited due to RBI smoothing.”