labels: finance - general, dsp merrill lynch, economy - general
DSP Merrill Lynch sounds cautionary note for fixed income securities segmentnews
Our Corporate Bureau
14 January 2005
"While we expect lower inflation and comfortable liquidity, we think the market has discounted this," notes DSP Merrill Lynch in the January 2005 issue of its India Fixed Income Monthly. It notes, "We believe that the market is not assigning a reasonable probability to RBI actions, unanticipated supply and other negatives," that could derail the positives because both are still evenly balanced.

As the positives the report lists the fairly rapid easing of the initial surge in and decline in crude prices, as a result of which any inflationary pressures are expected to be neutralised by the "significant positive base effect."

However, striking a note of caution, the report notes that policy makers are unlikely to sit back since despite the easing of inflation, there are distinct signs of increasing inflationary pressures. "Given the pickup in the investment cycle, there are risks of more liquidity reduction measures or rate hikes in the future."

What Could The Bad News Be?

  • The centre's surplus is expected to fall and spending could pick up ahead of the year-end. The centre has already sought approval for additional expenditure and this increases the risk of additional unanticipated supply.
  • Credit demand continues to be strong and can affect demand for gilts if additional supply hits the market.
  • More rate hikes in the US, RBI actions and higher than expected inflation (after the base effect wears out) can all trigger unwinding in the markets. The volatility in liquidity conditions also requires term premium to widen to reflect this uncertainty. Given the bearish undertone, these risks are likely not visible in current levels.

What themes would guide the markets in 2005. The report sites diverse views on key variables impacting the market, such as "International factors like crude oil, the US Fed funds rate and diverse views on commodity prices, etc, do indicate the complexity in predicting trends."

Against this backdrop, the report feels the fixed income markets will show no clear trend and trade in a range, with current levels close to the lower end of the range.

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DSP Merrill Lynch sounds cautionary note for fixed income securities segment