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Informist, Wednesday, May 20, 2026

 

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--DSP MF Yadav: Do not see rate hikes by RBI MPC in at least next 3 meetings
--DSP MF Yadav: Don't see MPC changing 'neutral' stance even if it hikes rate
--CONTEXT: DSP MF debt head Sandeep Yadav's remarks in interview
--DSP MF Godambe: See nuanced rate hike cycle, see terminal repo rate at 6%
--CONTEXT: DSP MF debt fund manager Shantanu Godambe's remarks in interview
--DSP MF Yadav: Current West Asia crisis not extreme stress event
--DSP MF Yadav: See West Asia war ending in couple of months
--DSP MF Yadav: See elevated inflation main worry FY27 because of El Nino
--DSP MF Yadav: Do not see GDP growth improving FY27
--DSP MF Yadav: In base case, see 10-yr gilt yield at 6.75% or pre-war level
--DSP MF Yadav: See 10-yr gilt at 6.50% if war ends soon, RBI buys bonds
--DSP MF Yadav: Bond market agnostic at times to positive news
--DSP MF Yadav: See 10-yr gilt yield rising to 7.50% if oil rises to $170/bbl
--DSP MF Yadav: Do not expect Centre to borrow more via bonds in FY27
--DSP MF Yadav: See INR 1.5 tln-INR 3.5 tln of RBI OMO gilt buys FY27
--DSP MF Yadav: See banks buying bonds if 10-yr gilt yield rises to 7.50%
--DSP MF Yadav: See bank demand for gilts even if yields fall FY27
--DSP MF Godambe: Favour long-term gilts on low supply, investor demand
--DSP MF Godambe: See 30- to 50-year gilt supply at 25% or lower Oct-Mar
--DSP MF Godambe: Margin of safety in up to 1-yr debt if rate hikes happen
--DSP MF Godambe: CD rates elevated; space for yields to fall
--DSP MF Godambe: Expect better demand for G-sec vs corporate bonds
--DSP MF Godambe: Corporate bond yield spreads may not come down
--DSP MF Godambe: Expect higher NBFC bond issuances in FY27 vs FY26

 

By Cassandra Carvalho and J. Navya Sruthi

 

MUMBAI – The Reserve Bank of India's Monetary Policy Committee is unlikely to raise the repo rate for at least the next three policy meetings, Sandeep Yadav, head of fixed income at DSP Mutual Fund, told Informist in an interview last week. The interview was conducted before the government raised the retail prices of petrol, diesel, and compressed natural gas Friday.

 

The rate-setting panel is likely to prioritise addressing a structural and crisis-led slowdown in economic growth even as inflation in India is seen rising, Yadav and Shantanu Godambe, fund manager at DSP Mutual Fund, said. The fund managers' comments come at a time when the one-year overnight indexed swap rate is pricing in around six hikes of 25 basis points each in the repo rate over the next 12 months.

 

"I expect the Iran war to be eased in a couple of months' time. You can see oil prices, if not crashing, lower than where they are. We expect inflation to be elevated because of the weather patterns this year driven by El Nino," Yadav--who overseas assets worth around INR 670 billion--said. "(In such a scenario) your oil has come off (highs), but your inflation is still elevated because of the agriculture. And your growth, I don't see the growth really coming up in this fiscal year."

 

Recent commentary from RBI officials has indicated concern of a hit to growth, Godambe said, while pointing out that India's GDP growth slowed down and the information technology sector was "struggling" even before the war in West Asia began. Godambe expects a "nuanced" rate hike cycle, with a terminal rate of 6.00%, due to differences in the current inflation and growth dynamics compared to previous cycles. At the end of the Monetary Policy Committee's last rate hike cycle in February 2023, the terminal repo rate was 6.50%. The rate-setting panel is unlikely to change its "neutral" stance even if it begins raising rates, Yadav said.

 

"They (the rate-setting panel) have cut the rates in neutral cycle, I think they will hike the rates also in neutral cycle. For all you know, unless and until a COVID (COVID-19 pandemic) kind of instance happens, probably we'll see a neutral stance forever ­from RBI," Yadav quipped.

 

The fund managers said domestic inflation is their main concern, primarily because of the likely lower rainfall as a consequence of the El Nino phenomenon than the war in West Asia. Yadav said the conflict in the Persian Gulf region is "not an extreme stress event" and expects it to be resolved in due course. Once the war ends, he expects oil prices to fall from their current multi-year highs as supply is likely to rise, particularly after the United Arab Emirates left the Organization of the Petroleum Exporting Countries and its allies on Apr. 28. Iran's economy is not in a position to sustain the war for long, while political pressure will reduce the propensity of the US to continue the war as the mid-term elections near, Yadav said.

 

GOVERNMENT BONDS

As Yadav expects the war in West Asia to be short-lived and oil prices to ease, he also expects the yield on the 10-year benchmark government bond to fall to 6.75% or lower, to around its pre-war level of 6.66%, in this financial year. The fund manager sees the 10-year yield capped at 7.50% in 2026-27 (Apr-Mar) even if the price of crude oil surges to $170 a barrel. However, if the war ends sooner than in a couple of months and oil prices tumble, the benchmark yield could fall to as low as 6.50%, he said. The 10-year benchmark yield is currently at 7.12%.

 

Slackening economic growth will also make it conducive for bond yields to ease, Yadav said. The fund managers expect the Centre to meet its fiscal deficit target in FY27. Even if the Centre overshoots its deficit target, borrowing through issuance of dated securities is unlikely to rise as the Centre could opt for funding through other avenues such as the National Small Savings Fund and the issuance of Treasury bills, Yadav said.

 

"In the base case where the Iran war is finally over, we don't see government increasing its market borrowing at all," he said. "We think that they will maintain (meet) their fiscal deficit (target)."

 

In fact, the asset managers expect the RBI to conduct open market operations to buy gilts in FY27 to ease the pressure of supply, subject to the central bank's monetary policy trajectory. The RBI is likely to buy gilts worth INR 3.5 trillion in FY27 if the central bank prioritises economic growth and inflation does not surge, they said. However, if the Monetary Policy Committee begins hiking rates, the central bank would want lower liquidity in the banking system and so Yadav and Godambe expect it to buy gilts worth only INR 1.5 trillion through OMO.

 

The fund managers currently prefer gilts maturing in 30-50 years as demand for these is seen firm from the usual investors--insurance companies and pension funds--while the supply of these bonds has fallen to 25% in the borrowing calendar for the first half of FY27 from 35% a year ago. Godambe expects the share of these long-dated bonds to remain at 25% or lower in the Centre's borrowing plan for the second half of the financial year as well.

  

Yadav expects demand from banks to support bond prices during the year, after tepid demand from them in FY26. He expects banks to purchase gilts regardless of where the 10-year bond yield is, whether at 6.50% or 100 bps higher. Scheduled commercial banks bought only around INR 3 trillion of central and state government bonds in FY26, about a third of the gilts purchased by the central bank that year, according to RBI data.

 

"In India, where regulatory demand is a significant, probably larger, part than discretionary demand, it is very difficult for yields to spike up. And one last thing is, we do know that RBI is not hesitant to step it in (into) the markets. So yes... if it (the 10-year benchmark) goes to 7-half (7.50% yield), I think you'll see a lot of banks stepping in...," Yadav said.

 

Going ahead, if the war between Iran and the US is prolonged, international crude oil prices rise to $170 per barrel, and the Centre raises its fiscal deficit, Yadav expects this combination of factors--though improbable--to push the yield on the 10-year government bond to 7.50%. This would be the highest level since October 2022.

 

"India already is struggling where oil is right now," Yadav said. "So, you worry on your CAD (current account deficit), you worry on the dollar-rupee, you worry on the fiscal. The El Nino impacts and your inflation moves higher, not just because of imported, but domestic inflation. That, in my view, will be catastrophic."

 

Godambe said the pace of the 10-year bond yield moving higher due to a worsening outlook for bond prices will be relatively slower compared to the propensity of yields falling on triggers that bode well for prices. Yadav said the bond market is, at times, "agnostic" to positive news. If the war ends quickly, in less than a couple of months, and crude oil prices slide to lower than the pre-war level, if domestic inflation is under check and growth reduces, the yield on the 10-year government security will fall to 6.50%, he said, but noted that this isn't a realistic scenario.

 

If the RBI conducts OMOs to buy gilts to support growth or temper the effect of any increase in the government's fiscal deficit, it would create more demand from banks and overcome the negative sentiment, Yadav said. A 10-year government bond yield at 6.50% would be the lowest since mid-January. Godambe said the fund managers do not have a target on government bond yields "because a lot of moving parts are there right now".

 

CORPORATE DEBT

The yield spreads between certificates of deposit and commercial paper vis-a-vis overnight borrowing rates have space to come down, making debt maturing in up to a year a "margin of safety" investment even if the Monetary Policy Committee raises the repo rate this year, Godambe said.

 

Due to banks' preference for government bonds, the spread between corporate bonds and government securities is likely to remain high, he said. "I am not saying that it (the spread between corporate bonds and gilts) can increase further, they are already quite wide, but some technicalities because of which we feel that spreads may not come down in corporate bonds, because we expect the demand on the G-sec (government securities) front (to be) better," he said.

 

Godambe expects corporate bond issuances by non-banking finance companies to be higher in FY27 over the previous year while total fundraising by companies through debt is expected to remain largely steady to slightly higher on year. "For the triple-A PSUs (public-sector undertakings), I still expect modest growth or flattish numbers, I don't expect very high issuances from them immediately. There will be little uptick, but (it) will not be a very meaningful number," the fund manager said.  End

 

US$1 = INR 96.85

 

Edited by Rajeev Pai

 

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