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Informist, Thursday, Dec. 5, 2024

By Aaryan Khanna

NEW DELHI – Likely easing of monetary policy conditions is likely to keep India's bond yields this month anchored to their lowest levels since February 2022. At the three-day Monetary Policy Committee meeting that began Wednesday, the Reserve Bank of India is expected to take measures to spur growth, including a possible rate cut. 

According to the median of estimates from 14 money managers, treasury heads, and economists polled by Informist, the yield on the 10-year 6.79%, 2034 bond is seen at 6.70% at the end of December. After trading north of 6.80% for most of the month, the benchmark yield ended November at 6.74%, and was at 6.68% on Wednesday, falling 13 basis points over the past week.

The trigger was a shocker of a GDP growth print for the September quarter, which was well short of the RBI's forecast. GDP growth in Jul-Sept fell to a seven-quarter low of 5.4%, against 6.5% pegged in an Informist poll and the central bank's own estimate of 7%. Bond yields reacted immediately in anticipation of the rate review bringing much-awaited policy easing.

The consensus view is that the RBI will inject liquidity through a cut of 50 basis points in the cash reserve ratio, rather than the MPC beginning its rate cut cycle this week, bringing the policy repo rate down by 25 bps to 6.25%. The major obstacle to an immediate rate cut is that the latest CPI inflation print for October topped the RBI's 2-6% comfort band, poll respondents said.

Regardless, Monetary Policy Committee members, including RBI Governor Shaktikanta Das, are expected to refocus on growth at the December meeting, after softening the policy stance to 'neutral' from 'withdrawal of accommodation' in October. Even if the panel doesn't cut rates immediately, traders said at least one more member along with external member Nagesh Kumar would vote for a rate cut at the MPC decision on Friday. Kumar had voted for a 25-basis-point rate cut at his first meeting as an MPC member in October.

"I think it is too early for them to cut rates considering the previous guidance," said Vikas Goel, managing director and chief executive officer at PNB Gilts, a primary dealership. "They can opt for a cash reserve ratio cut, which will show them taking action after the GDP print. Then they can set the stage for a February rate cut, which could include removing the focus on last-mile disinflation and so on."

Some respondents also said they expected the RBI to announce open market bond purchases at the December MPC meeting. The majority of respondents see this as an unlikely move compared to a cash reserve ratio cut, which would have only a liquidity implication without swelling the RBI's balance sheet or changing the shape of the gilt yield curve. 

Yields on long-term bonds may continue to see some upward pressure as state bond supply ramps up towards the end of the financial year in March. Meanwhile, demand from life insurers has lagged most market estimates, and is unlikely to revive immediately in December, which may lead to underperformance against gilts maturing in up to 15 years, respondents said. 

The repricing of rate expectations has been quick and even though a rate cut is not fully priced in on Friday, traders are likely to book profits regardless of the decision. A fall in the 10-year yield below 6.65% is a minority view in December because the market is not able to gauge whether a single reading showing a significant slowdown in growth would lead to a deeper rate cut cycle than previously expected. Market expectations have shifted to a cumulative 75-bps rate cut by the end of 2025, rather than 50 bps, but there is no certainty of any further rate cuts, respondents said.

"Most of the market participants are already positioned well to take advantage of the fall in yields, which may limit the downside (in yields)," said Dhawal Dalal, president and chief investment officer – fixed income at Edelweiss Mutual Fund. "We are most constructive on the 5-10 year space for government securities, on a risk-adjusted returns basis."

There is so much focus on the MPC outcome on Friday, as it is likely to be the singular event to lend direction to gilts in December, respondents said. CPI inflation in November is expected to return to the RBI's comfort band and is not expected to delay rate cuts, though it is seen well above the central bank's 4% target.

Foreign investors' activity, which has boomed in the past week after a dull November, is likely to fade again following the MPC decision as they close their accounts for the year. The US Federal Open Market Committee’s rate decision on Dec. 19 could be crucial if it elicits a sharp reaction in US yields, though gilt yields will not be very sensitive to US cues without foreign activity, respondents said.

There is no widespread view on any upside in yields, particularly with more certainty on rate cuts than ever before in this rate-easing cycle, awaited since late 2023. However, India's fast-depreciating currency is seen as a major risk due to any discussion of rate cuts, particularly extensive ones in 2025. Donald Trump's election as US president has led the dollar index firmly higher, and spurred outflows from the Indian market. The rupee has depreciated nearly 0.8% since the US election, to a record low of 84.77 against the dollar on Tuesday.

"Regardless of whether or not there is a rate cut on Friday, there will be a sell-off afterwards," said Poonam Tandon, chief investment officer at IndiaFirst Life Insurance. "I think what the market is not realising is that with the RBI letting the rupee depreciate, there is going to be an inherent weakness in gilts as inflation will bite immediately, at least on the import basket." Tandon has the most pessimistic view on gilts, seeing the 10-year yield returning to as high as 6.85% by December-end.

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

End

US$1 = INR 84.74

Edited by Avishek Dutta

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