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Informist, Friday, Oct. 4, 2024

 

By Aaryan Khanna

 

NEW DELHI - Government bond yields are likely to fall in October as traders expect the Reserve Bank of India's Monetary Policy Committee to edge closer to an interest rate cut. While the MPC is widely seen leaving the repo rate unchanged at 6.50% on Wednesday for the tenth meeting in a row, market participants are of the view that the committee may soften its stance to neutral from 'withdrawal of accommodation'. This may open the door for a rate cut as early as December, although heightened geopolitical tensions and next month's US Presidential elections are keeping traders from increasing their bond holdings.

 

The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.71% by the end of October, according to the median of estimates of 15 money managers, treasury heads, and economists polled by Informist. In September, yield on the 10-year benchmark bond had declined by 11 basis points to end the month at 6.75%. On Friday, the benchmark ended at 6.83%.

 

"We're already at 6.75%, so it should remain in this range, and there's no immediate reason for the yield to go lower also," said Marzban Irani, chief investment officer – debt at LIC Mutual Fund. "...there was some expectation of change of stance at policy, but personally, I don't see that happening."

 

On the other hand, Sameer Karyatt of DBS Bank India said he was targeting a move in the 10-year gilt yield to 6.70% by the Monetary Policy Committee meeting on Wednesday. Based on a change in stance to neutral at the meeting, he sees the benchmark yield at 6.65% by the end of October.

 

"Historically, the 10-year gilt yield has aligned more closely with the repo rate ahead of a rate cut cycle," Karyatt, executive director and head of trading at DBS Bank India, told Informist. "Before the rate cut cycle begins, we anticipate a flat yield curve, with steepening expected once the rate cuts commence."

 

In August, while the MPC had left the repo rate unchanged, external members Ashima Goyal and Jayanth Varma had voted to cut it by 25 bps to 6.25%. However, the reconstitution of the MPC after the end of the external members' four-year terms has seen Goyal and Varma exit the committee and seen three new experts take their place. According to economists, the new set of external members--Delhi School of Economics Director Ram Singh, economist Saugata Bhattacharya, and Institute for Studies in Industrial Development Director and Chief Executive Nagesh Kumar--are "more neutral than hawkish", with Bhattacharya expected to vote for a rate cut.

 

Market participants are of the opinion the MPC will vote to cut the repo rate by 25 bps each in December and February.

 

POSITIVE DYNAMICS

While the recent geopolitical developments in West Asia over the past week have propelled global crude oil prices higher and eroded some of the feel-good factor from the sharp drop in commodity prices over the last couple of months, bond traders continue to think local factors are supportive.

 

"Demand-supply dynamics are still very positive, and that will eventually drive the yields lower," said Vijay Sharma, head of trading at PNB Gilts, a primary dealership. "Even if there's no change at the MPC next week, we will be closer to a rate cut by October-end, and the market will have priced that in."

 

The Centre and states' borrowing plans, released last week, left the market underwhelmed. While traders expected the Centre to lower its bond issuances by INR 100-300 billion, state governments' decision to borrow INR 3.20 trillion in Oct-Dec was slightly higher than expectations.

 

Regardless, the appetite for bonds is seen robust and set to exceed the expected supply. Any uptick in gilt yields may prompt purchases by domestic banks that have to maintain larger buffers of liquid assets, such as government securities, due to an impending tightening of guidelines on the Liquidity Coverage Ratio. Insurance firms also see significant inflows in the second half of the fiscal year. This could cap long-term bond yields.

 

So far in October, the 10-year benchmark yield has already increased by 11 bps to 6.82% from the lows hit in September, led mostly by external factors. This trend is expected to sustain through the month. Geopolitics apart, the US Presidential election--scheduled for Nov. 5--will be keenly eyed, although both the candidates, Vice President Kamala Harris and Republican candidate Donald Trump, are seen as being fiscally expansionary. This may prevent a fall in the US Treasury yield despite continuing rate cut hopes from the US Federal Reserve.

 

The following are estimates of yield levels/range for the 10-year benchmark bond at the end of October:

 

Institutions	Yield on the 10-year benchmark
Anand Rathi Global Finance	6.70-6.80%
Bank of Bahrain and Kuwait	6.60-6.85%
CSB Bank	6.65%
DCB Bank	6.60-6.70%
DBS Bank India	6.65%
Federal Bank	6.65-6.80%
HDFC Bank	6.70-6.80%
ICICI Securities Primary Dealership	6.65-6.68%
Industrial and Commercial Bank of China	6.70-6.75%
Karur Vysya Bank	6.70-6.71%
Kotak Mahindra Bank	6.65-6.70%
LIC Mutual Fund	6.70-6.80%
PNB Gilts	6.65%
Sundaram Mutual Fund	6.65-6.85%
UCO Bank	6.70%

 

End

 

With inputs from Siddhi Chauhan, Cassandra Carvalho and Srijita Bose

Edited by Vandana Hingorani

 

 

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