BENGALURU, Nov 11 (Reuters) – India’s benchmark 10-year government bond yield may have already peaked, according to market strategists who say the Reserve Bank of India’s imminent move from the fight against inflation to support the economy is not far off.
While Indian government debt markets have remained relatively calm compared to other major sovereign debt markets, yields are still more than 75 basis points higher so far this year, the biggest rise since the start. of the year 2017.
Currently around 7.26%, Indian benchmark yields have only partially tracked the 190bps repo rate tightening announced by the RBI since May.
The repo rate currently stands at 5.9% and according to a poll published by Reuters last month, the RBI’s bull run will have run its course by the first quarter of 2023.
The 10-year yield will rise slightly to 7.43% in six months, below its three-year high of 7.62% set on June 16, according to the median forecast of a Reuters poll of 22 analysts conducted from June 7. to November 10.
Less than a third expected it to surpass this year’s peak at some point in the coming year.
“Fiscal risks remain contained, domestic inflation is expected to moderate going forward and the RBI terminal rate close to 6.50% has already been priced in,” said Sakshi Gupta, senior economist at HDFC Bank.
She expects the 10-year yield to trade in a range of 7.35-7.50% over the next few months.
But she added that “any indication of a higher terminal rate in India or the US…and upside inflation surprises could push the yield up to 7.60%.”
Indian consumer price inflation likely slowed in October to 6.73% but has remained stubbornly well above the upper 6% limit of the RBI’s tolerance range, a separate poll predicted. Reuters.
The rise in Indian yields so far this year has been moderate compared to US 10-year Treasury yields, which have risen more than 230 basis points as the US Federal Reserve raised its benchmark rate more aggressive than the RBI.
Strategists said that after rising over the next six months, India’s benchmark yield will return to 7.25% in a year.
Asia’s third-largest economy is set to grow well below its potential over the next two years, and underscoring this concern, the spread between two- and 10-year government bond yields has recently narrowed. to reach its lowest level since 2019.
A few strategists have warned that the spread could turn negative, which in the US is a reliable sign of an impending recession.
“An inversion does not actually reflect a recession, but it does highlight that the Indian economy will slow significantly over the next few months,” said Kunal Kundu, Indian economist at Societe Generale.
“It will slow down considerably next year, but 4-5% growth in a country like India is actually a recession.”
Some fund managers share similar concerns, worried foreign investors were unlikely to enter the Indian government debt market, despite attractive valuations. So far this year, foreign investors have sold nearly $2 billion of Indian debt.
(For an article on major government bond yields and money market rates: read more)
Reporting by Indradip Ghosh and Vivek Mishra; Poll by Veronica Khongwir and Vijayalakshmi Srinivasan; Editing by Hari Kishan, Ross Finley and Simon Cameron-Moore
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