The rate market has been very active, the ten-year bond yields have touched one-year lows, while the bond yields have risen to 7.3 percent.
said this price action has surprised a lot of people. The reason for this weakening in 10-year bond prices could be a combination of few factors, like the recent rise in inflation print increasing the expectation of monetary tightening at some point of time, he said.
Moreover, there is also the fact that this 10-year bonds will soon be off the run and that also has played role in the weakening of bond prices and rise of bond yields, said Rajpal.
At Nomura they still expect the RBI to stay on hold for long period but the market usually tries to price-in some probability etc., he said. So their base case is no interest rate hike.
Historically as well, the Indian rates market has been sensitive to crude oil prices and therefore the recent rise in crude prices has contributed to rise in yields, he said.
When asked if he expected borrowing more than the calendar in January, Rajpal said given that the government hasn’t declared extra borrowing or hinted on that front, the probability of extra borrowing is reducing.
Talking about inflation trajectory at Nomura, he said because the RBI has a real rate cushion for them to stay on holdinflation will rise from here but despite that do not expect rate hikes full of 2018.
According to him, the bond yields would stabilise around 7.25 percent and then as the new 10-year benchmark comes, there would be a tactical rally in the Q1 of fiscal year. Q1 is expected to be okay for bonds, and could see 10-15 basis points of rally, said Rajpal.
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