The recent tumble in Indian bonds that’s made them worst performers among major Asian nations this month need not spell a long-term rout.
Yields have climbed 25 basis points to 6.71% after the central bank’s decision on Dec. 5 to hold policy combined with worries over government borrowings. Traders say the sell-off may be overdone as the pause doesn’t necessarily mean the easing cycle has ended.
“The sentiment is very negative at the moment but there is potential for positive news to have an asymmetrically positive reaction,” said Dushyant Padmanabhan, a strategist at Nomura Holdings Inc. in Singapore. “A smaller slippage or less-than-expected additional market borrowing, or even a drop in inflation could see yields fall sharply.”
The negative narrative surrounding India’s debt market comes at a time when benchmark yields are set for their first annual drop in three years following Asia’s most aggressive easing. While the punchbowl has been taken away for now, Governor Shaktikanta Das this week reminded investors that the central bank still has their back.
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The RBI’s rate-setting panel cited high consumer prices as the reason for the pause that followed five back-to-back rate cuts this year. Some economists expect 25-50 basis points of reduction later in 2020 as arrival of winter harvests help stabilize food prices.
“It’s likely that if overall inflation comes near or below 4%, there may be room for further cuts,” said Avnish Jain, head of fixed income at Mumbai-based Canara Robeco Asset Management Co. “Such a window may open in April, wherein we could see a 25-basis point cut.”
High Premium
Weighing the recent bond sell-off in light of such expectations, some market players are calling a bottom and predicting a rebound once the government’s fiscal position is clear.
The market is pricing in 1.3 trillion rupees ($18 billion) of additional borrowing, which includes some spillover into the year starting April 1, according to Deutsche Bank AG. That’s “sufficient to argue that the risk from deficit slippage is (over?) priced,” Sameer Goel, macro strategist at the lender, wrote in a note.
The current conditions are apt for India to deviate from its deficit target, RBI’s Das said in an interview to Financial Express on Thursday. “To what extent the government will invoke it, and whether they will invoke it is a call the government has to take,” the newspaper quoted Das as saying.
The administration is likely to sell 9.1 trillion rupees of debt in the year starting April 1, 28% more than the record borrowings lined up for this fiscal, according to Kotak Mahindra Bank.
“We believe that the high term premium is a result of uncertainty about the government’s fiscal stance and it will correct when the government clears its position,” said Pankaj Pathak, fund manager - fixed income at Quantum Asset Management.
Following are some forecasts for the 10-year bond yield:
table-bondA move by the government to raise foreign holding limits in sovereign bonds could be another trigger for the rally. India may raise this cap to at least 10% of outstanding stock, from 6% at present, as it seeks to get the securities added to global indexes, the Business Standard reported earlier this month, citing officials it didn’t name.
Indian bonds are in a “tussle between fiscal overhang and a still accommodative RBI,” according to Citigroup Inc. The lender said it expects two more rate cuts, which could ease 10-year yields to 6%-6.6% over the next year.
