Page 65 - UDYAMA FINAL final for web

RECOMMENDATIONS Yield Curve may rise by 150-200bps and reach our upper bands of
Bond Market: Bearish 1Q 2021 the yield curve
onwards

Pressure on Bonds yields to rise
from 1Q 2021 onwards, but rise
may be slower due to higher
liquidity: Pressure on Bond
yields are likely to mount, due to
the following reasons,

• Foreign Debt Repayments -
Foreign debt repayments are
high during 2021. Lower Bond Yields to gradually trend up from 1Q 2021 onwards followed by
foreign reserve position may 2 policy rate hikes in 2H 2021:
push local yields higher. With the rise in Govt borrowing requirement, rising consumer demand
and private credit, we expect a gradual increase in pressure on bond
• High budget deficits - Lower yields during 1Q 2021 and afterwards gradually move up further during
revenue and higher infrastruc- 2021. On a base case we expect a stable policy environment upto Jun
ture spending may lead to a 2021 followed by policy rates reverting upwards with potential 2 policy
continued higher budget hikes in 3Q/4Q.
deficit in 2021 resulting in
strong rupee borrowing Banking Rates: Pressure on banking rates to rise
requirement.
Banking Rates (AWPR) to gradually trend upwards and readjust
above the 5Yr Bond yield:
• Rising Private Sector Credit With the lack of credit, AWPR fell below the 5-Yr bond, breaking the
Growth - Stronger private historical trend of moving in line with the 5-Yr Bond. As private credit
sector credit growth may push picks up AWPR may return to the historical trend.
yields higher amidst Govt’s
focus to borrow from domes-
tic market. We expect the AWPR to have bottomed out and is
likely to rise amidst the competition for debt from
Fixed Income Health Expectations may register a Govt and Private Sector as Private credit picks up.
steep depreciation while A potential IMF program With bond yields expected to move up, we expect
towards Jun 2021 cannot be ruled out. AWPR to fall to a range of 6.5% - 7.0% by Jun - 2021
and further move towards 7.0% - 8.0% by Dec -
3 Months 3 - 6 Months 6 - 9 Months 9- 12 Months
Outlook Outlook Outlook Outlook 2021.
Jan - Mar 2021 Apr - Jun 2021 Jul - Sep 2021 Oct - Dec 2021
Health Score
Estimate 50 - 55 45 - 50 45 - 50 50 - 55

Risk Level - Medium - High High Medium -
Jan 2021 High High
Previous Medium - High
Expectations- High
Sep 2020

Fixed Income Health Score

Exchange Rate: Target for 1H2021 narrowed
down to LKR 196.0-202.0 with 2021 Year End
target at LKR 205.0-215.0

January 2021 63