Bond Street Outlook 2024 | Yields likely to see downward movement on US rate cut expectations, FPI inflows

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Indian bond yields are likely to see a downward movement in 2024 due to expectation of rate cuts by the US Federal Reserve and inflows from foreign investors after inclusion in JP Morgan’s Emerging Bond Index, experts said.

The expected range for the 10-year benchmark government bond is 6.70-7.30 percent, they added.

“We see a downward bias in yields in the calendar year 2024. We expect the US Federal Reserve to cut rates by 150 basis points (bps) between March 2024 and June 2025. We expect the 10-year bond to trade in the range of 6.70-7.30 percent in CY 2024,” said Deepak Agrawal, CIO - Debt, Kotak Mahindra AMC.

One basis point is one-hundredth of a percentage point.

Adding to this, Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP, said on expectations of an increase in Foreign Portfolio Investment (FPI) investment following India’s inclusion in the JPMorgan bond index, the 10-year government bond yields may go down till 6.75 percent.

“In case of any delay in events, the 10-year G-Sec yields may trade within a range between 6.75 percent and 7.00 percent till December 2024,” Srinivasan added.

In its policy meeting this month, the US Federal Reserve held its key interest rate steady for the third straight time and set the table for multiple cuts in 2024 and beyond.

Further, JP Morgan Chase & Co will add Indian government bonds to the JPMorgan Government Bond Index-Emerging Markets starting June 28, 2024.

India’s addition to a major global gauge will give global investors greater access to the world’s fastest-growing large economy that offers some of the highest returns in the region.

The inclusion may also prompt inflows of as much as $30 billion, according to HSBC Holdings Plc.

The move has significant implications for investors in India's debt market, with the country’s weight in the index going up to a maximum of 10 percent, and eligible government bonds valued at $330 billion, analysts said.

Investment by FPIs in Indian bonds through Fully Accessible Route (FAR) has already increased after the index inclusion announcement. According to the data, as of December 20, 2023, FPI investment in FAR securities had risen 35 percent since September 22, and 65 percent since April 3.

Money market experts said this will eventually help bond yields to trade lower.

Also read: How India’s bond market evolved over the last 10 budgets under Modi govt

Yield movement in 2023

At the start of the calendar year 2023, the yield on Indian bonds, especially 10-year benchmark bond, was higher in the range of 7.00-7.44 percent due to higher inflation and rate hikes by the Reserve Bank of India (RBI), experts said.

The yields started falling in April after the central bank paused rate hikes due to better economic conditions and a lower inflation trajectory. At that time, the yield on the 10-year benchmark bond fell from 7.44 percent to below 7 percent.

Srinivasan said the rate pause was totally a surprise package to the bond market despite the RBI cautioning the market that the rate pause was not a pivot.

"RBI paused it’s rate hike cycle which came as a positive surprise to the market leading to a rally post the MPC. Along with that, globally bond yields fell in other emerging market economies," said  Vijay Kuppa, CEO of InCred Money.

The RBI hiked rates by 250 bps since May 2022 to curb higher inflation, which was trading above 6 percent, the upper end of the RBI’s tolerance band, before pausing in April this year.

India's headline retail inflation rate surged to 5.55 percent in November 2023, according to data released by the Ministry of Statistics and Programme Implementation on December 12, due to a combination of an unfavourable base effect and a rise in prices of key food items.

The Consumer Price Index (CPI) inflation print in October was 4.87 percent.

At 5.55 percent, the latest CPI inflation figure is below expectations, with economists having predicted prices likely rose 5.8 percent year-on-year in November.

Later in July, the yields started going up gradually, which experts said was due to expectations of more interest rate hikes by the US Fed and the announcement of Incremental Cash Reserve Ratio (I-CRR) to drain out liquidity, among other factors.

“The rise in global bond yields, coupled with the RBI actively draining liquidity through the announcement of Incremental CRR hike, in August 2023 and intent to conduct OMO sales in October 24 policy led to spike in domestic bond yields as well,” Agrawal said.

After July, the 10-year bond yield remained in the range of 7.10-7.40 percent.

Also read: Planned reduction in face value of NCDs may boost liquidity of lower-rated bonds: Experts

OMO expectations

In the October monetary policy, the central bank said it may have to consider OMO(Open Market Operation) sales to manage liquidity, consistent with the stance of monetary policy.

Soon after the announcement by the RBI, the yield on the 10-year benchmark government bond started rising. Initially, it rose 7-8 bps in the morning trade and rose 15 bps in the afternoon trade.

Currently, the yield on 10-year benchmark government bonds is at 7.1914 percent.