The yield on government securities, which has risen over the past few days, is expected to soften in the next few months because of easing inflation and lower risk premium, Ashima Goyal, one of the three external members on the Reserve Bank of India's Monetary Policy Committee, told Moneycontrol in an exclusive interview.
“I expect yields to soften in the next few months because of falling Indian inflation and risk premiums,” Goyal said following the release of the minutes of the MPC's April 3-5 meeting.
The yield on government securities, especially the 10-year benchmark, has risen more than 15 basis points since the start of this financial year amid rising US Treasury yields and tensions between Iran and Israel.
The yield on the 10-year benchmark ended at 7.23 percent on April 19, the highest since January 5, 2024, when it was at 7.235 percent, according to Bloomberg data.
Most of the yield increase was witnessed after Brent crude oil prices started climbing amid Iran-Israel tensions. On April 13, Iran fired over 300 drones and missiles at Israel, calling the attack a retaliation to a strike on its consulate in Syria, allegedly by Israel, earlier in the month.
Tel Aviv said it would retaliate and "extract the price from Iran” and has urged tighter sanctions against Tehran.
Support from low inflation
Over the past few days, India’s retail inflation rate has been moving towards the medium-term target of the RBI, which is also supporting bond yields. Goyal said it will help yields in the coming months. The inflation target is 4 percent, with the upper tolerance level of 6 percent and the lower tolerance level of 2 percent.
Goyal said in the MPC minutes that inflation approaching the target suggests the absence of over-heating, so growth is below potential, and the neutral interest rate (NIR) has not risen.
“If despite robust growth core inflation is less than 4 percent, yet continues to fall, there cannot be excess demand,” she said.
In March, India's headline retail inflation rate eased to a 10-month low of 4.85 percent from 5.09 percent in February. At 4.85 percent, the latest headline retail inflation figure is the lowest since May 2023 when it came in at 4.31 percent.
Also read: MPC Minutes: Inflation concerns continue to dominate policy review
Foreign inflows
Goyal said in the interview that inflows from foreign investors in Indian bonds will continue, considering the country's growth prospects and macroeconomic stability.
“India’s growth prospects and macroeconomic stability proved major attractors for foreign investors in the past year and these will continue beyond blips in investor sentiments,” she said.
Foreign investment in debt instruments remained positive in the past few months, especially after the announcement of the inclusion of Indian bonds in JPMorgan’s bond index.
However, flows turned negative in the past few days amid global uncertainties. FPI net investment turned negative and stood Rs 6,174 crore up to April 19, according to data from the National Securities Depository Ltd.
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