Informist, Tuesday, Jul 5, 2022

By Aaryan Khanna and Shubham Rana

NEW DELHI – Investor caution ahead of the Reserve Bank of India's monetary policy meeting early in August will likely see yield on the 10-year benchmark government bond settle around the current levels at the end of July.

According to 12 treasury heads, economists, and analysts polled by Informist, the yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.41% at the end of July, against 7.45% at the end of last month. Today, the bond was at 94.25 rupees or 7.39% yield.

In June, yield on the benchmark bond had climbed to 7.62%, the highest level in over three years, after the US Federal Reserve raised its key interest rate by 75 basis points. Later in the month, the yields cooled off as US Treasury yields and crude oil prices slumped due to fears of recession in the world's largest economy.

Towards the end of July, bond yields will again be swayed by the US Federal Reserve's interest rate decision. Although the Fed may be wary of engineering an economic downturn, policymakers have signalled a 50-75 basis point rate hike at the next policy meeting that ends on Jul 27.

If the Fed stays the course on rate hikes, domestic traders may turn wary of buying bonds as the RBI's Monetary Policy Committee would then be expected to keep up its pace of rate increases as well.

Any rise in bond yields may be capped by the expectation that the market has already weathered a large part of the RBI's current rate hike cycle.

Since May, the RBI has raised the repo rate by a cumulative 90 bps. Although further rate increases remain on the table, recent comments by members of the rate-setting panel hint at growing concern of the rate hikes impinging on economic growth.

Domestic bonds may also benefit from a softening outlook on inflation, given the slump in commodity prices and the government's measures to ease supply-side inflation through lower levies on automobile fuels and key industrial raw materials in May.

With the CPI print for June expected to provide some comfort, the RBI's projection that pegs average retail inflation at 7.5% in Apr-Jun could be undershot, analysts said.

"Globally, that fear of slowdown is catching up," said Naveen Singh, head of trading at ICICI Securities Primary Dealership. "Only crude is the one factor which is holding up, apart from that every commodity has corrected, and that correction is more than 25% over the last three months."

However, the massive supply of government securities may begin to strain the portfolios of bond investors as the Centre's record borrowing of 14.31 trln rupees for 2022-23 (Apr-Mar) enters the second quarter.

Though the Centre borrowed rather painlessly from the market in Apr-Jun, institutional investors played a key part in absorbing the fresh debt supply. Investors may not retain the same appetite as state bond issuances pick up pace, as these papers offer higher returns than gilts of comparable maturities, analysts said.

States are set to borrow 2.12 trln rupees in Jul-Sep, according to an indicative calendar released by the RBI. In the previous quarter, they issued only 1.10 trln rupees worth of bonds.

Following are estimates for the yield levels/range in percentage for the 10-year benchmark bond by the end of July:

End

Edited by Ashish Shirke

Informist, Tuesday, Jul 5, 2022

By Aaryan Khanna and Shubham Rana

NEW DELHI – Investor caution ahead of the Reserve Bank of India's monetary policy meeting early in August will likely see yield on the 10-year benchmark government bond settle around the current levels at the end of July.

According to 12 treasury heads, economists, and analysts polled by Informist, the yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.41% at the end of July, against 7.45% at the end of last month. Today, the bond was at 94.25 rupees or 7.39% yield.

In June, yield on the benchmark bond had climbed to 7.62%, the highest level in over three years, after the US Federal Reserve raised its key interest rate by 75 basis points. Later in the month, the yields cooled off as US Treasury yields and crude oil prices slumped due to fears of recession in the world's largest economy.

Towards the end of July, bond yields will again be swayed by the US Federal Reserve's interest rate decision. Although the Fed may be wary of engineering an economic downturn, policymakers have signalled a 50-75 basis point rate hike at the next policy meeting that ends on Jul 27.

If the Fed stays the course on rate hikes, domestic traders may turn wary of buying bonds as the RBI's Monetary Policy Committee would then be expected to keep up its pace of rate increases as well.

Any rise in bond yields may be capped by the expectation that the market has already weathered a large part of the RBI's current rate hike cycle.

Since May, the RBI has raised the repo rate by a cumulative 90 bps. Although further rate increases remain on the table, recent comments by members of the rate-setting panel hint at growing concern of the rate hikes impinging on economic growth.

Domestic bonds may also benefit from a softening outlook on inflation, given the slump in commodity prices and the government's measures to ease supply-side inflation through lower levies on automobile fuels and key industrial raw materials in May.

With the CPI print for June expected to provide some comfort, the RBI's projection that pegs average retail inflation at 7.5% in Apr-Jun could be undershot, analysts said.

"Globally, that fear of slowdown is catching up," said Naveen Singh, head of trading at ICICI Securities Primary Dealership. "Only crude is the one factor which is holding up, apart from that every commodity has corrected, and that correction is more than 25% over the last three months."

However, the massive supply of government securities may begin to strain the portfolios of bond investors as the Centre's record borrowing of 14.31 trln rupees for 2022-23 (Apr-Mar) enters the second quarter.

Though the Centre borrowed rather painlessly from the market in Apr-Jun, institutional investors played a key part in absorbing the fresh debt supply. Investors may not retain the same appetite as state bond issuances pick up pace, as these papers offer higher returns than gilts of comparable maturities, analysts said.

States are set to borrow 2.12 trln rupees in Jul-Sep, according to an indicative calendar released by the RBI. In the previous quarter, they issued only 1.10 trln rupees worth of bonds.

Following are estimates for the yield levels/range in percentage for the 10-year benchmark bond by the end of July:

End

Edited by Ashish Shirke