Even as the recent S&P revision of India's outlook to positive from stable is unlikely to impact local markets much, local bond yields may trade stable in the range of 6.75 percent to 7 percent on strong domestic cues, experts said.
Other factors including likely continuation of political stability, easing domestic inflation, strong growth and expected inflows from bond inclusion too may help the bond market, experts added.
"The positive outlook reflects our view that continued policy stability, deepening economic reforms, and high infrastructure investment will sustain long-term growth prospects. That, along with cautious fiscal and monetary policy that diminishes the government's elevated debt and interest burden while bolstering economic resilience, could lead to a higher rating over the next 24 months," S&P said in a statement.
“India 10-year bond will drift towards 6.75 percent during the financial year. This is on the back of political stability, strong growth/inflation/fiscal dynamic and favorable demand supply dynamics in bond markets,” said Vijay Sharma, Senior Executive Vice President, PNB Gilts.
However, experts said further narrowing of spread between 10-year benchmark bond and repo rate may see some sell-off in the market.
Mataprasad Pandey, Vice President, Arete Capital Service said If the spread between 10-year government securities and repo rate comes below, then there may be some selling pressure.
Also read: Indian Bank hits all-time high after S&P Global revises outlook to 'positive'
Falling yield
Since April, yield on government securities fell around 10-15 basis points (bps) due to multiple factors, such as easing inflation print, Brent crude oil prices, and later, higher dividend transfer announced by the Reserve Bank of India (RBI).
Further, it saw some moderation after S&P revised outlook for India. Along with that, the ratings agency affirmed our 'BBB-' long-term and 'A-3' short-term unsolicited foreign and local currency sovereign credit ratings.
“We expect sound economic fundamentals to underpin the growth momentum over the next two to three years,” the ratings firm added.
On May 30, the 10-year benchmark bond 7.10 percent 2034 bond yield closed at 6.9966 percent.
Also read: S&P Global will likely raise India's rating within 2 years: Citi
Election results implications
On May 29, Moneycontrol reported that Indian rupee and the yields on government securities are expected to react negatively on June 4, if the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) fails to secure 300 seats in the Lok Sabha elections 2024.
The election results are set to be announced on June 4. The Lok Sabha has 543 seats. The President of India maintains the authority to nominate a maximum of two members to represent the Anglo-Indian community.
Sentiments of the market participants are expected to dampen if BJP secures lower seats than expected, experts said.
If the opposition INDIA bloc secures a majority, it will hit the rupee severely and it could touch the 85-mark against the US dollar, experts said.
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