India Benchmark Yield Dips To 7.02%, Further Softening Expected In Near-Term: Experts

Yield on the benchmark 10-year Indian government bond slipped to 6.98% early on Thursday—the lowest level in about 13 months—before recovering to 7.02% to close the day.

The yield on the 10-year bond also declined the most in seven months on Wednesday and closed 8 basis points lower at 7.01%.

While a wide variety of factors seem to have driven the overall rally in the benchmark bond over the last couple of days, resurgent demand from local investors and expectations of the Federal Reserve's rate hiking cycle being put on pause seem to be the headline items, according to industry experts BQ Prime spoke with.

People are drawing comfort in the expectation that there shouldn't be more rate hikes in India and are moving in to lock in higher rates now, Ajay Manglunia, managing director and head of the investment grade group at JM Financial, told BQ Prime.

"Some bit of easing across the board is making the [yield] curve flattish," he said.

Yield on the one-year Indian government bond stood at 6.91%, as of market close on Thursday. The five-year bond's yield was higher by only 4 basis points at 6.95% on the same day.

In about six months, we expect the benchmark yield to soften further to closer to 6.75%, Madhavi Arora, lead economist at Emkay Global, told BQ Prime.

India faces a tricky situation with a mixed growth picture and the correction in U.S. yields not reflected back home as yet, she said. "Over the medium term, everything is supporting world markets," Arora said.

Despite yields softening on the benchmark bond, spreads on the credit side have remained unwarrantedly high, Manglunia said. These spreads are expected to correct once we start to see rate cuts, he said.

The banking turmoil seen in the United states, slowing inflation both globally and at home, and lower brent crude price are also among factors contributing to the softness seen in benchmark yields, Sandeep Yadav, head of fixed income at DSP Mutual Fund, told BQ Prime.

"Bonds yields are going to gravitate lower," Yadav said, noting that black swan events aside, he doesn't expect bond yields to move markedly higher.

A softening in bond yields is also likely to aid Government of India's borrowing plan for FY24, which involves the sale of about Rs 9 lakh crore ($109 billion) bonds between March and September, or 58% of the overall full-year target of Rs 15.43 lakh crore, according to a March statement from the country's Finance Ministry.