Government bond yields in India remained stable throughout the week without any decisive cues or changes in fundamentals. The benchmark 10-year government bond yield ended the week marginally lower at 6.97 percent, down from 6,98 percent yield last Friday.
Meanwhile, as Indian bonds are scheduled to be included in JPMorgan’s GBI-EM Global index from June 28, a JP Morgan report indicated an expected inflow worth USD 20 to USD 25 billion into the bond market.
“Assuming an index-neutral position, we expect foreign inflows to be between USD 20-25 billion following index inclusion, based on the estimated AUM tracking the GBI-EM GD and the expected 10 percent weight of India in the benchmark,” said Gloria Kim, Global Head of Index Research, JPMorgan. Tracking the movement in US yields and oil prices, the bond yield remained stable throughout the week except for a slight dip on June 19 when soft retail sales data in US was released. The benchmark 10-year yield then slipped one basis points (bps) to 6.967 percent. The retail sales data rekindled expectations of US Federal Reserve rate cuts this year. The market participants are expecting two rate cuts in FY25 even as projections have been revised to one rate cut this year.
In the upcoming week, nine state governments plan to conduct an auction of state government securities through the Core Banking Solution (E-Kuber) system on June 25, 2024 to raise a total of Rs 17,071 crore.
Treasury and Bond Yields
The indicative yield for T-bills currently stands at 6.81 percent, 6.96 percent, and 6.98 percent for three-month, six-month, and 364-day durations, respectively. In the 1-2 year tenure, the 7.17% GS 2028 indicates a yield of 6.98 percent.
Moving on to longer tenures, the 7.37% GS 2028 (4-5 year tenure) and the 7.10% GS 2034 (9-10 year range) both show indicative yields of 6.98 percent and 6.97 percent respectively.
Bond Market Outlook
JP Morgan signalled that non-resident holdings of India Government Bonds (IGBs) will double in one year, from the current 2.5 percent of outstanding to over 4.4 percent, as the accessibility of the IGB market improves. The inclusion of Indian bonds in the index in June is expected increase demand from foreign investors by increasing the bond prices and lowering the yields.
Market analysts are keen on the outcomes of the forthcoming Union Budget in July. Fiscal deficit targets, economic reforms, and borrowing plans remain their focus, as a fiscally disciplined budget could help drive down bond yields.
Meanwhile, in the RBI minutes released on Friday, two external members of the six-member monetary policy committee (MPC) of the Reserve Bank of India (RBI) have strongly advocated for cutting down the policy repo rate. As the next MPC meeting is scheduled from August 6 to August 8, 2024, debt market participants are keen on the outcome because if one more member favours rate cut, the casting vote of RBI governor will be called for.
