A rally in India’s sovereign bonds may end soon, as traders shift their focus to upcoming heavy debt issuances from the positive impact of the central bank pausing its rate hikes.
India’s 10-year yield dropped below 7% on Thursday, the first time since April 2022 due to falling crude prices and the prospect of a Federal Reserve rate pause. But now, a potential increase in government debt supply in the coming months and a lack of rate cut expectations in the near term are threatening to stall the advance.
The benchmark yield fell 11 basis points in the first week of May, after posting its biggest monthly decline since 2020 last month. The move came as the Reserve Bank of India surprised traders by opting for a pause in its April policy.
India plans to sell about 9 trillion rupees ($110 billion) of bonds in the six months to September, or 58% of the record 15.43 trillion rupees full-year target. The supply deluge may face resistance from buyers especially after the recent rally and with banks holding bonds well above their regulatory limits.
Inflation Watch
“The upcoming inflation numbers are likely to be benign, extending the RBI pause easily to the third quarter, but a rate cut is not the base case here,” said Abhisek Bahinipati, fixed-income trading head at Mirae Asset Capital Markets India. “So with 6.50% as repo rate, government bonds will find it difficult to trade meaningfully below 7%.”
Australia & New Zealand Banking Group is also recommending shorter-maturity bonds in this scenario.
“We have a preference for the front-end of the India government bond curve, having assessed that valuation of short-dated government bonds is not rich versus the policy rate and swaps,” said Jennifer Kusuma, senior Asia rates strategist at ANZ. “We are neutral further out the curve at current levels.”
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