The yield on the 10-year benchmark government bond is expected to range between 7.20 percent and 7.40 percent in the near term because Indian traders have already discounted a further rate increase by the Reserve Bank of India (RBI) and easing inflation worries, dealers said.
Any further movement will depend on commentary by the RBI at the monetary policy review, the dealers said.
"I feel traders and investors have already discounted a 25-35 basis point rate hike by the RBI and inflation worries have eased,” said Ritesh Bhusari, Deputy General Manager, Treasury, South Indian Bank.
“Hence yield on 10-year G-sec we expect to trade between 7.20 and 7.40 percent. Beyond 7.35 percent levels, we will see good buying by investors," he added.
Inflation is expected to cool as the effect of RBI’s rate increases since May, adding up to 190 basis points, begins to kick in. One basis point is equal to one-hundredth of a percentage point.
Retail inflation, measured by the Consumer Price Index, dropped to a three-month low of 6.77 percent in October, although it is still above the RBI’s comfort zone.
After the December monetary policy meeting, where a hike of 25-35 basis points is likely, the yield’s direction will depend on the central bank’s commentary, said Anand Nevatia, fund manager at Trust Mutual Funds.
“A dovish commentary is likely to take yields below 7 percent as markets would be certain of nearing the end of the rate hike cycle. However, a steep hike from US FOMC (Federal Open Markets Committee) in its December policy may lead to higher yields," added Nevatia.
The yield on the 10-year benchmark bond has eased more than 20 basis points since start of this month and is currently trading at 7.2794 percent.
Also read: Drop in October inflation unlikely to deter RBI from hiking rates, say economists
Has the rising bond yield phase passed?
Money market dealers said bond yields have seen a significant increase since the central bank started raising interest rates and there have been indications that the pace is likely to slow because of various positive factors emerging.
“As markets are always forward-looking, most the rate hikes are discounted, and till there is a signal from central banks to the contrary, yields are expected to be range-bound,” Nevatia added.
Since the start of the rate hike cycle by the central bank, yield on government securities, especially on the 10-year benchmark bond, had risen sharply and breached 7.50 percent levels. They have since fallen.
RBI Deputy Governor Michael Debabrata Patra said on November 12, 2022, in a speech at a treasury heads’ seminar organised by the central bank in Lonavala, that an increase in the policy rate has an immediate negative impact on the slope of the yield curve because the impact of the policy rate change is swiftly and completely transmitted to short-term maturities, causing the yield curve to become flatter.
The level and curvature of the yield curve needs to be watched more closely by monetary policy makers because they are better informed on future macroeconomic outcomes than the slope, he said.
What constrains monetary policy in India is that liquidity in the G-sec market is not uniform across the curve and concentrated in only on-the-run securities maturing in 5 years, 7 years, 10 years and 14 years.
The G-sec market is also vulnerable to spillovers from both global and domestic developments. It can sometimes produce idiosyncratic results as, for instance, in response to the announcement of the government’s borrowing programme.
Also read: Corporate bond issuances growth may slow as higher rates hurt: Dealers
Why bond yields eased ?
The yield on the 10-year benchmark bond has eased more than 20 basis points since November 3 due to expectations of easing inflation and lower rate hikes by the RBI.
Easing crude oil prices and profit booking by traders have also helped bond yields to ease.
The 10-year benchmark 7.26%-2032 bond yield, which was 7.4829 percent on November 3, eased to 7.2808 percent on November 17.
"November 3 onwards bond yields have eased because of the cooling inflation expectations in the US and a positive sentiment on account of improving geopolitical circumstances," said Vivek Iyer, partner and leader, financial services risk, Grant Thornton Bharat.
The evolution of Indian bond yields has been quite interesting so far this year, Suyash Choudhary, head of fixed income at IDFC Asset Management Company, wrote in the report Volatility and Valuation : A Macro and Bond Update.
The bulk of the upward adjustment actually happened in the short period between April and June as the markets repriced a change in RBI’s reaction function, he said.
Unlike many of their developing market peers, Indian yields haven’t gone higher than their June highs save for the very front end, which was to be expected as the rate cycle progressed.
Indeed, while yields in the 5-year segment are similar to what they were in mid-June, those in 10 years and beyond are actually lower, he added.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
