A majority of fixed income investors expect the fiscal deficit to stay close to the government's target of 5.5 per cent or lower in the year to March 2011, according to a Fitch Ratings survey of money managers at asset management companies, life insurers, pension funds and banks.
The outlook was a result of improving sale of shares of public sector units and funds raised from auction of telecom licences, the survey said. Most investors expect yield on the 10-year government bond between 7.5 per cent and 8 per cent in the last three months of 2010, according to the survey, conducted in July and August.
The single biggest risk for the credit quality of banks came from government policies and regulations, while other risks included macro-economic conditions, withdrawal of stimulus, real estate sector and restructured loans, it said.
Over the next 12 months, bank lending would grow between 20 per cent and 25 per cent and net interest margins would rise by 10 basis points, according to 50 per cent and 44 per cent respondents, respectively.
The investors attributed inflation and rising interest rates as the greatest threats to the debt markets, followed by global sovereign issues and the budget deficit.
A majority 79 per cent predicted the government support to the infrastructure sector would be effective, while a majority expected the economy would expand faster than eight per cent. About three-fourth respondents don't see any impact on India's economy, banks or financial institutions of European events this year.
Still, fund managers were evenly split on if Indian companies were prepared to face another economic downturn. About half said the upcoming repayment of restructured loans would heighten the default risk. The year would witness more companies using cash for capital expenditure, debt repayment and mergers and amalgamations, it said.
