Informist, Friday, Feb 2, 2024

By Nishat Anjum

MUMBAI – After a stellar start to February, the yield on the 10-year government bond is expected to fall further by the end of the month as the government's gross borrowing programme ends. The continuation of robust foreign investment in gilts may well make for an overwhelming demand-supply mismatch that is likely to bring the benchmark yield to the key 7% mark for the first time since June.

According to the median of estimates of 14 money managers, treasury heads, and economists polled by Informist, the yield on the 10-year benchmark 7.18%, 2033 bond at the end of the month is seen at 7.00%, against 7.14% on Jan 31. Today, the bond's yield ended at 7.06%, slumping immediately after the presentation of the Interim Budget for 2024-25 (Apr-Mar) on Thursday.

Government bond yields plunged on the first day of the month as the market rejoiced at the government's announcement of a sharply lower-than-anticipated gross borrowing programme for the next financial year. The gross market borrowing in the next fiscal is pegged at 14.13 trln rupees, against 15.20 trln rupees seen in an Informist poll, and down from the record 15.43-trln-rupee borrowing programme that ends on Feb 16.

Post the gross borrowing announcement, yields fell the most in nine months, and pulled the 10-year benchmark yield down to its lowest close since Jul 18. The ramifications of the announcement are likely to be felt through the month and beyond, and investors – particularly insurers and pension funds – may pile into bonds maturing in 14 years and above to deploy typically robust cash flows from retail savers in Jan-Mar.

"There are enough investors chasing over a short supply of bonds," a treasury head at a state-owned bank said. "We had already seen momentum building before the Budget, but after that I don't think traders can be stopped for the next several months."

Foreign banks have been the top net buyers for nearly all of January, and bought nearly 500 bln rupees in the secondary market, according to the Clearing Corp of India Ltd data. They likely stepped up purchase of gilts in the secondary market for their foreign clients. This may continue going ahead, moving closer to India's inclusion in JP Morgan's Global Bond Index – Emerging Markets index in June, respondents said.

Data from the Clearing Corp of India showed that foreign portfolio investors bought Indian gilts worth 189.82 bln rupees in January alone, a record, and their holdings of fully accessible route securities, that are index-eligible, were at 1.52 trln rupees today. Surging demand from this section of the market is why nine of the 14 respondents see gilt yields ending the month below the 7% mark.

The respondents see a few negative factors that may hinder the happiness of the gilt market traders. These include geopolitical tensions which may create supply-chain disruptions, leading to a rise in global commodity prices such as crude oil, the participants said. On the domestic front, the market will keep an eye on the CPI inflation data for January, due on Feb 12.

"I think anything that has to do with the Middle East can be negative. The risk is sufficiently in the price right now...," said Sakshi Gupta, principal economist at HDFC Bank. "The second risk is the fact that a lot of the US data continue to surprise on the upside, which would mean that this constant repricing of rate cuts happens in the market, then gets too aggressive."

After market hours today, US non-farm payroll data showed that the world's largest economy added 353,000 jobs in January, nearly double the estimates. The unemployment rate was lower than expected, while wages grew more than forecast. Consequently, rate cut expectations by the US Federal Reserve are likely to be pushed back further from the March consensus that was seen a month ago. But despite a rise in US Treasury yields in January, domestic gilt yields actually fell 4 basis points.

Closer home, the key deciding factor for the 10-year yield to fall below the 7% mark is the three-day Monetary Policy Committee meeting, scheduled to end on Thursday, respondents said. The market expectations of the policy were divided when it came to the policy stance. A section expects the domestic rate-setting panel to change the policy stance to "neutral" from the current "withdrawal of accommodation".

However, if the rate-setting panel delivers another status quo policy and the Reserve Bank of India remains stoic in keeping monetary conditions tight, the momentum in bond yields may falter. Most respondents expect some easing of liquidity conditions through the month and reverse its shadow rate hike, even if no stance change comes through. Since October, overnight rates have tended to be near the Marginal Standing Facility rate of 6.75% rather than the policy repo rate of 6.50%.

"We do not expect any change in RBI's stance. The RBI should give clarity on where it wants overnight rates to be," said Gaura Sen Gupta, economist at IDFC FIRST Bank. "Definitely, it does not want overnight rates to be below the repo rate." 

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

End

(With inputs from Siddhi Chauhan, Anupreksha Jain, and Aaryan Khanna)

Edited by Tanima Banerjee

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