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Informist, Thursday, Aug 1, 2024

 

By Anupreksha Jain

 

MUMBAI – The yield on the 10-year benchmark government bond is seen little changed by the end of August as it has already priced in positives on the global and domestic fronts with the Reserve Bank of India's Monetary Policy Committee meeting next week largely seen as a non-event.

 

The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.90% at the end of August, according to the median of estimates of 15 money managers, treasury heads, and economists polled by Informist. The yield on the 10-year benchmark fell 8 basis points in July to end at 6.93%.

 

The biggest positive was captured at the US Federal Open Market Committee's outcome late Wednesday, where it kept rates unchanged for the eighth straight time. However, the US rate-setting panel adopted a softer tone in its policy statement, noting some further progress on inflation falling to its 2% target. In addition, it also cited risks to both sides of its dual mandate on inflation and maximum employment. This is a departure from earlier statements, when it only cited risks to inflation.

 

This is likely to pull down US Treasury yields further in the coming weeks, provided employment deteriorates and inflation falls – both expected by a majority of poll respondents. For Indian markets, the biggest support would be increased bond buys from foreign portfolio investors. FPI buys of bonds under the fully accessible route totalled 177.55 bln rupees in July, and may top 200 bln rupees in August, respondents said.

 

Foreign portfolio investors may buy even more of India's index-eligible gilts amid its ongoing phased inclusion on JP Morgan's Government Bond Index – Emerging Markets as risk appetite increases, interest rate differentials become more lucrative to foreigners, and more capital is allocated to emerging markets. The most optimistic forecast for the 10-year gilt yield is to fall to 6.80% in a month's time, levels not seen since March 2022.

 

However, the softening tone of monetary policy in the US is not expected to be adopted by the RBI anytime soon, much less a quick turnaround to rate cuts. RBI Governor Shaktikanta Das has said in July that inflation is too far away from the central bank's 4% medium-term aim, and discussions of softening the monetary policy stance or cutting interest rates are premature.

 

"It doesn't look like RBI is going to relent at all, despite Fed indicating a rate cut," Naveen Singh, head of trading at ICICI Securities Primary Dealership said. "After falling in July, I don't think a further drift downward will be possible from here."

 

The market is expecting the upcoming MPC meeting to be a non-event, keeping the policy repo rate at 6.50% and the monetary policy stance at "withdrawal of accommodation." In fact, the majority said that a surprise, if at all, may be negative – that the RBI will choose to announce open market operations as a measure to impound excessive banking system liquidity, which averaged a surplus of 1 trln rupees in July. In the fortnight ended Jul 19, the central bank net sold 61.20 bln rupees worth of gilts through OMOs in the secondary market. Any announcement on open market operations could jolt the 10-year benchmark gilt yield to as high as 7.05%, depending on the size of the sales.

 

Moreover, market participants warn of the upside risk to headline inflation due to the volatility in food inflation and crude oil prices inching upwards. These may keep the central bank on its toes. The latest data print showed India's headline CPI inflation in June rose to a four-month high of 5.08%.

"Both because of the uneven distribution of rainfall in India, and the increase in freight costs and crude due to geopolitics, traders, and the RBI have to keep at least one eye on inflation," Rajeev Radhakrishnan, chief investment officer, SBI Mutual Fund, said. "I don't think the US Fed rate view moves the needle on the domestic policy front, there is enough reason for caution at this point".

These negatives – if they come about – are likely to pull back the 10-year yield to 7.0% at the most, they said. The supply of gilts in 2024-25 (Apr-Mar) is seen far outstripped by demand, particularly after a recent RBI proposal on liquidity coverage ration that could lead to investment portfolios of banks to expand. With the 10-year bond yield already at over-two-year lows, investors would capture and lock in any rise in the benchmark yield to 7% or beyond, respondents said.

 

The market expects the government bond yield curve to steepen slightly in August, particularly between the 10-year gilt and longer-tenure bonds, dealers said. For short-term bonds, traders do not expect yields to fall sharply from here unless the domestic policy stance softens or overnight money market rates disconnect from the repo rate and are consistently around 6.40%, respondents said.

 

Following are the estimates for yield levels/range in percentage for the 10-year benchmark bond at the end of August:

 

Institutions	Yield on the 10-year benchmark
ANZ Bank	6.80%
DCB Bank	6.85-6.95%
Emkay Global Financial Services	6.97%
HDFC Bank	6.85%
Industrial and Commercial Bank of China	6.90-6.95%
ICICI Bank	6.85%
ICICI Securities Primary Dealership	6.90%
IDFC FIRST Bank	6.90%
Karur Vysya Bank	6.90-6.95%
LIC Mutual Fund	6.85-7.05%
PNB Gilts	6.90%
SBI Mutual Fund	6.90-7.00%
Shinhan Bank India	6.85-7.05%
STCI Primary Dealer	6.85%
UCO Bank	6.80-6.85%

 

(With inputs from Aaryan Khanna)

 

End

 

Edited by Deepshikha Bhardwaj

 

 

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