Bond market upsurge in India slows down amidst escalating fiscal concerns and waning investor interest.
India's long-duration bond rally may have reached a turning point, according to financial analysts. Axis MF suggests that unless the country experiences a significant growth shock or renewed momentum from Bloomberg index inclusion, the rally is likely over.
The yield on 10-year government securities has risen by 17 basis points in the past two weeks, with the current yield hovering at nearly 100 basis points above the policy repo rate. The primary drivers of this rise are weak direct tax receipts, concerns over higher supply, and investor positioning.
The Reserve Bank of India (RBI) has been a significant factor in supporting the bond market. Its accommodative monetary policy, evidenced by rate cuts and liquidity management, has supported bond prices and lowered yields, particularly for long-duration bonds. However, the RBI's recent cut in the cash reserve ratio reduces the likelihood of fresh bond purchases in the second half of the year.
Strong institutional and foreign demand has also contributed to the rally. Institutional investors show robust demand, with bid-to-cover ratios around 2.04 for 5-7 year bonds and passive inflows of $30-40 billion annually. Foreign portfolio investors are attracted by the 270 basis points spread between Indian and U.S. 10-year yields, though global geopolitical and commodity price risks add caution.
However, supply pressures and external risks could lead to yield volatility ahead. The total supply of long-bond securities is estimated to be 11.98 trillion rupees, exceeding the expected demand of 10.82 trillion rupees from insurers, pension, and provident funds. This imbalance could put pressure on yields, especially for long-duration maturities.
The 30-year bond is trading at a spread of 180 basis points over overnight rates, but the supply-demand scenario is problematic, according to Shantanu Godambe, vice president of fixed income investments at DSP Mutual Fund. If a supply cut happens as expected, the market may see a return of sanctity to the long-duration bond segment and some spread compression on the longer end.
Despite these challenges, long-term investors typically favor long bonds for stable returns to match their future liabilities. However, near-term volatility remains a risk, according to analysts. Ketan Parikh, head of fixed income at ICICI Prudential Life, predicts that 30-year yields could rise to 7.30-7.40% from 7.20%.
Nominal GDP growth is expected at 8%-8.5% in the financial year 2026, below the budget assumption of around 10%. Slowing tax revenues and weaker nominal GDP growth are straining government finances, which could further impact the demand for long-duration bonds.
In summary, while the RBI's accommodative policy and strong institutional and foreign demand have driven down long-duration bond yields in India, supply pressures and external risks could lead to yield volatility ahead. Long-duration bonds may still offer value for long-term investors, but near-term volatility remains a risk.
- The momentum of India's bond rally may be waning due to a potential growth shock, as suggested by Axis MF, following the significant increase in 10-year government securities yield.
- The Reserve Bank of India (RBI) has been a critical supporter of the bond market, lowering yields through accommodative monetary policy and reduced cash reserves.
- Institutional investors demonstrate a strong appetite for longer-term bonds, with bid-to-cover ratios indicative of robust demand, while foreign investors are drawn by the high spread between Indian and US yields.
- The supply of long-bond securities in India is estimated to exceed demand, creating potential pressure on yields for long-duration maturities.
- The 30-year bond's supply-demand situation is problematic, according to DSP Mutual Fund, but a potential supply cut could restore sanctity to the long-duration bond segment and compress spreads.
- Long-term investors gravitate toward long bonds for stable returns to match their future liabilities, but near-term volatility remains a significant risk.
- Nominal GDP growth forecasts for the financial year 2026 are lower than the budget assumption, which may strain government finances and impact the demand for long-duration bonds.
- In the personal-finance arena, investors should be aware that long-duration bonds may offer value for long-term investments but face risks of near-term volatility.
- Despite challenges in the bond market, investments in business and finance continue to draw interest, with risks such as volatility and liabilities playing crucial roles in investment positions.
- The Defi (decentralized finance) sector may offer alternative opportunities for risk-averse investors seeking lower volatility and steady returns, as they navigate the world of investments and finance.
