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.
Read also:
- Discusses Rasmus Sojmark's thoughts on the Legends Charity Game before SBC Summit
- Stone mining has transformed the once renowned 'Sada Pathor' into a desolate, post-apocalyptic landscape.
- In the Heart of Soho, Manhattan, a New Brewery Emerges Underground
- Financial regulatory body OCC imposes Anti-Money Laundering (AML) disciplinary action against Wells Fargo.
