Informist Poll
Gilts may be volatile, 10-year yield could cool to 6.75% Jan-end
This story was originally published at 10:15 IST on 3 January 2025
Register to read our real-time news.Informist, Friday, Jan. 3, 2025
By Aaryan Khanna
NEW DELHI – An event-heavy January promises some volatility for the government bond market, but domestic and offshore cues are likely to cancel each other and prevent a large move in either direction. The median of estimates of 13 money managers, treasury heads, and economists polled by Informist pegged the yield on the 10-year 6.79%, 2034 bond at 6.75% at the end of the month.
The yield on the benchmark ended December at 6.76% as it fell 42 basis points in 2024. The bond settled at 6.79% on Thursday.
"The problem for the fixed income market is that we are facing upward pressure on our yields from external factors, but on the flip side, domestic factors support a decline in yields," Gaura Sen Gupta, chief economist at IDFC FIRST Bank, said.
Unlike 2024, when the floodgates for foreign portfolio investments in Indian debt opened in the New Year--foreign investors pumped in $2.5 billion in January 2024 alone--the outlook for foreign inflows is dubious this time around. According to one bond trader, Jan. 20 is "the real New Year", in a nod to the date when US President-elect Donald Trump will assume the presidency. The businessman-turned-politician's proposed policies on tariffs and tax cuts are seen pushing up US inflation and fiscal deficit. How the US market reacts to the first few days of Trump's second term as president will strongly influence Indian gilt yields as well, respondents said.
Another negative could be a rapid depreciation in the rupee, which was estimated to be overvalued by around 8% in November, as per the Reserve Bank of India measure of the Real Effective Exchange Rate. On Thursday, the Indian currency ended at a record closing low for the eighth straight session at 85.75 a dollar and has depreciated 1.0% in the last two weeks. This has made foreign investors reassess their view on Indian assets, built as it was on a relatively stable rupee.
"There is sure to be volatility because there are so many events and uncertainties to keep up with, most of all whether the Trump trade returns in full force," Dwijendra Srivastava, chief investment officer – debt at Sundaram Asset Management Co., said. "That will flow to us on the currency front, though the current account deficit is not an immediate concern."
ONSHORE MATTERS
Days after the 'real New Year' begins on Jan. 20, the focus will shift to local events, with Finance Minister Nirmala Sitharaman set to present the Budget for 2025-26 (Apr-Mar) on Feb. 1. Less than a week later, on Feb. 7, the RBI's Monetary Policy Committee will announce its interest rate decision.
Respondents expressed confidence that the 10-year gilt yield would return close to current levels as the market positions itself ahead of the Budget, with traders expecting the government to comfortably meet its fiscal deficit target of 4.9% of GDP for FY25. As per the latest data, the Centre's fiscal deficit was just 52.5% of the full-year target in the first eight months of the year. Meanwhile, in FY26, the government's net borrowing is likely to be flat or rise only marginally and is seen easily absorbed by domestic investors. "This government has consolidated and delivered very well on the fiscal front and I don't think that is going to change," Sundaram Asset Management's Srivastava said.
In more good news, the MPC under newly-appointed RBI Governor Sanjay Malhotra is seen cutting interest rates on Feb. 7, with two external members having already voted for a 25-bps repo rate cut in December. Inflation data for December, to be released on Jan. 13, is not seen playing spoilsport at a time when growth has slowed down sharply.
The state of liquidity conditions also continues to fuel talk of the RBI having to buy bonds via open market operations before next month's monetary policy decision. Banking system liquidity is seen in deficit for much of Jan-Mar. With the central bank having already cut the cash reserve ratio by 50 bps in December to the pre-pandemic level of 4.00%, respondents think open market purchases are among the only tools left in the central bank's arsenal to infuse durable liquidity.
"We have a good chance that the fiscal deficit will be lower than the FY25 target. Second, RBI needs to infuse durable liquidity. Whichever instrument it chooses, it will help government securities," Sen Gupta of IDFC FIRST Bank said.
The following are estimates at the beginning of the month for yield levels/range for the 10-year benchmark bond at the end of January:
|
ORGANISATION |
Yield |
| Bank of Bahrain and Kuwait | 6.70-6.80% |
| CSB Bank | 6.75% |
| ICICI Securities Primary Dealership | 6.7-6.72% |
| IDFC FIRST Bank | 6.80-6.85% |
| Industrial and Commercial Bank of China | 6.75-6.80% |
| Karur Vysya Bank | 6.70-6.72% |
| Kotak Life Insurance | 6.75% |
| Kotak Mahindra Bank | 6.78% |
| Shinhan Bank | 6.60-6.85% |
| State-owned bank | 6.75% |
| STCI Primary Dealer | 6.70% |
| Sundaram Mutual Fund | 6.70% |
| UCO Bank | 6.75% |
End
US$1 = INR 85.76
Edited by Namrata Rao
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