Bond Bulls Pin Hopes on Dovish RBI Pivot to Extend Budget Rally
Yields slid to a seven-month low last week after New Delhi unveiled a borrowing plan that was below market estimates.
(Bloomberg) -- Bond traders in India are anticipating that a fiscally prudent budget may prompt the central bank to signal a dovish monetary policy tilt, and extend the best rally in more than year.
Yields slid to a seven-month low last week after New Delhi unveiled a borrowing plan that was below market estimates. That’s strengthening the case for the Reserve Bank of India to shift from the withdrawal of accommodation to a neutral stance in its Feb. 8 meeting or the next, according to traders.
“The fiscal compression will provide much comfort to RBI on attainment of its inflation target,” according to Suyash Choudhary, head of fixed income at Bandhan Mutual Fund. The central bank has little reason to delay easing its liquidity stance, given that inflation has been below its latest forecast, he said.
Kotak Mahindra Bank Ltd. expects India’s 10—year bond yield to fall to as low as 6.70% in the fiscal year starting April, while Barclays Plc. sees it dropping to 6.80%, from Friday’s close of 7.06%.
Indian bonds have rallied over the past three months, fueled by overseas inflows ahead of global index inclusion starting June. The 10-year yields are down by about 30 basis points since the end of October. They fell by 12 basis points last week, the most since Nov. 2022, after the prudent budget.
“We assign a 70% probability of a change in the monetary policy stance” in this week’s policy, said Puneet Pal, head of fixed income at PGIM Mutual Fund.
There’s a counterargument suggesting that while core inflation is easing, higher headline inflation might prompt the RBI to move cautiously with prices holding above its 4% target. Governor Shaktikanta Das has said the central bank won’t consider rate cuts until inflation settles firmly around its goal.
Nevertheless, traders remain optimistic as lower borrowings will make it easier for the market to absorb supply. That’s a plus in a year when inclusion of India’s debt in JPMorgan Chase & Co’s emerging market bond index is expected to lure large inflows.
India plans to borrow 14.13 trillion rupees ($170 billion) in the coming fiscal year, significantly lower than the 15.2 trillion rupees estimated in a Bloomberg survey. The budget deficit for the next fiscal year is targeted at 5.1% of the gross domestic product, compared with 5.8% for the current period.
“We have been bullish on bonds, and the budget reinforces our view,” said Sandeep Yadav, head of fixed income at DSP Mutual Fund, which managed 1.41 trillion rupees across all its stocks and debt funds as on Dec. 31. “Increasing demand and a decreasing supply makes 2024 a good year of bonds.”
Here are the key Asian economic data this week:
- Monday, Feb. 5: South Korea forex reserves, Australia Melbourne Institute inflation, Australia trade balance; PMI Composite and Services data across Asia, Thailand CPI, Indonesia GDP
- Tuesday, Feb. 6: RBA rate decision, Taiwan and Philippines CPI prints
- Wednesday, Feb. 7: New Zealand unemployment rate, South Korea balance of payments, Indonesia forex reserves, Malaysia industrial production, Thailand rate decision, Taiwan exports
- Thursday, Feb. 8: RBI rate decision, Japan current account, China PPI, CPI
- Friday, Feb. 9: Japan money stock, Thailand forex reserves
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