Yields To Drop As Indian Funds Play Long-Term Bonds Amid Global Debut

India's sovereign bond market is set for further decline in yields as domestic institutions are finding a sweet spot in the longer-term debt papers, amid the domestic gilts' global inclusion, according to fund managers.

The buzz on the street is that the benefits may already be priced in, given that the inclusion announcement was made last September. But, all is not over in the Rs 1-lakh-crore domestic bond market and yields might see a further drop, fund managers told NDTV Profit.

About 50-60% of inflows expected because of the addition to JPMorgan index are priced in and there could be some more fall in yields until the actual flows come, according to Devang Shah, head of fixed income, Axis Mutual Fund. "The balance of 40% of rally (fall) in yields will happen in the next two quarters and investors should continue to stay invested in long duration."

Everyone in the market knew that the inclusion was coming in June and so institutions, both foreign and domestic, piled onto the world's fifth-largest economy, according to Mahendra Kumar Jajoo, head of fixed income, Mirae Asset Global Investments (India) Pvt. "Some of the benefits are already priced," he said.

Further, Jajoo expects inflows stuck due to legal compliances to aid the flow.

JPMorgan Chase & Co. will add the domestic gilts to its benchmark emerging-market index starting on Friday. India's bond market has garnered overseas inflows of about Rs 1.06 lakh crore since last September, against a Rs 31,263 crore inflows into equities.

With an inclusion of 1% weight per month, the addition of the gilts will be staggered over 10 months, starting June 28 through March 31, 2025. From the current 2.5%, foreign ownership of India's bond market will nearly double to over 4.4% of outstanding over the next 12 months, JPMorgan estimates.

With strong macro environment and the current rate cut stance, we have a high allocation towards government bonds in long term, Shah said. There is a high possibility that benchmark yields would move closer to 6.70-6.80 levels, Shah said.

Short-term yield curve reacts sharply to the central bank's rate cuts, and they will perform once the rate cut cycle starts, he said. "How the investors will benefit today is by riding the interest rate cuts cycle, by investing in fixed income funds."

Mutual funds have clearly deployed funds on the long-duration bonds, Jajoo said. But, they might vary depending on the type and category of funds, he said. There are some funds holding 2053-54 year bonds for the first time, he noted.

There has been more focused demand in long-term bonds in this year's auction, keeping in mind the flows coming into the country, said Ajay Manglunia, managing director and head, Investment Grade Group at JM Financial Ltd. Expectations about the rate trajectory is also pumping up demand as the long tenure will give higher appreciation, he said.

The influx into the market has also kept bond yields steady. The erstwhile benchmark 10-year bond yield has fallen 2.34% since last September, while that of the 10-year US treasury rose 3.23%.

There has been around 35-40 bps fall from the peak for the benchmark bond, Shah said. The yields will not go below 6.5%, as there needs to be more triggers like additions to Bloomberg indices, or global growth shock for more decline in yields, he said.