Government benchmark bond yields ended the week lower than the previous week, but surged after the Reserve Bank of India (RBI) monetary policy committee (MPC) this week. The benchmark 10-year yield closed at 6.88 per cent, slightly higher than 6.86 per cent it was before the RBI MPC announcement on August 8, 2024. Last weekend, the benchmark 10-year yield was 6.90 per cent.
The RBI MPC voted 4-2 to keep the key policy rates unchanged as it maintained its cost price index (CPI) inflation forecast at 4.5 per cent, in expectation of high food prices.
This week also saw an upheaval in global markets following a decision by the Bank of Japan to hike rates last week, accompanied by the strengthening of the yen. This finally led to a significant rally in US government bonds and rates as safe haven investments took precedence over stocks.
Treasury And Bond Yields
The indicative yield for T-bills currently stands at 6.63 per cent, 6.72 per cent, and 6.73 per cent for three-month, six-month, and 364-day durations, respectively. In the 1-2 year tenure, 6.99% GS 2026 indicates a yield of 6.77 per cent.
Moving on to longer tenures, 7.37% GS 2028 (4-5 year tenure) and the 7.10% GS 2034 (9-10 year range) show indicative yields of 6.79 per cent and 6.88 per cent, respectively.
Bond Market Outlook
According to Vishal Goenka, co-founder of IndiaBonds.com, India remained fairly insulated from global upheaval after rate hikes by Bank of Japan.
“It is pretty certain that the US Federal Reserve will likely cut rates in its September meeting by expected 0.25 per cent. However, it may not necessarily transform into immediate cuts by the RBI, as insulation means domestic factors, as inflation and growth play an important role. The ‘wealth effect’ created by high equity valuations actually fuels inflationary pressures. The credit-deposit ratio imbalance in the banking system would further edge up market rates for capital and deposits,” said Goenka.
“Nonetheless, the interest rate trajectory points downwards, and it’s only a matter of when before 2024-end. The outlook for Indian bonds remains very constructive and has the potential to benefit from the cyclical down move in the next couple of years. The best way to express this would likely be a barbell strategy where the potential for capital gains is picked up from long-term government and bank infrastructure bonds. The benefit from a current high level of interest rates can be derived from short-term high yield bonds after investors’ due diligence on corporates,” he added.
Highlighting that central banks are not speculators, but insurers, Sandeep Yadav, head-fixed income, DSP Mutual Fund, said: “The base case expectation is that inflation and growth would come down globally, and in India. However, RBI needs to be aware of the what-if scenario. What if inflation and growth do not mimic the US’ in 2023? It is more prudent for RBI to hedge against tail risks of higher inflation.”
“We expect these tail risks of higher inflation to vanish in the coming weeks. We expect most central bankers to be dovish – and we expect RBI will be, too. We remain long on bonds.”
Tata Mutual Fund said in its forecast: “From the Indian fixed income market point of view, a fall in commodity prices is a positive indication for CPI inflation. RBI is expected to be more amenable to rate cuts in the coming months if the global economy situation deteriorates.”
