“Higher Bank deposit mobilization is unlikely to have a commensurate impact on lending in the near term, despite our expectation of some transmission to lower lending rates. As a result, a large part of Banks’ incremental deposits are likely to be invested in Government securities, even as the supply of the latter may be smaller than expected if demonetization indeed results in higher income tax collections for the GoI. Therefore, both higher demand from Banks and potentially lower supply from the Central Government would boost bond prices and dampen yields in the Indian markets.
In contrast, yields in the US have risen sharply over the last week, while bond prices have fallen. We expect FII interest in the Indian bond markets to continue in the near term, led by the expected principal appreciation.”
