The recent rally in the Indian bond market could be short-lived in the near-term as the market has priced in a 25 basis point cut in the central bank’s key repo rate and investments by foreign portfolio investors is likely to taper off since the debt utilisation level for FPIs have been nearly met. Domestic investors, including public sector banks, and the FPIs have aggressively bought government securities after the RBI considerably softened its stance on inflation in its monetary policy review last week, causing the benchmark yield to fall nearly 10 basis points in the past one week. On Tuesday, the 10-year benchmark yield closed at 6.49%, after falling to a low of 6.46%, a level last seen on February 8.
“In a neutral scenario, the 10-year yield generally stays 40-50 basis points above the repo rate. Given that the market has factored in a rate cut by the RBI, the 10-year yield will find it difficult to break the 6.4% mark,” a senior bond trader with a large state-run bank said.
Traders expect the benchmark yield to trade in the 6.40-55% range, at least till the next inflation data, which is due in mid-July. On Monday, data published by the government showed that the consumer price inflation in May fell to a record low of 2.18% from 2.99% in April.
“There would be some selling pressure from the public-sector banks around 6.45% levels, as they would want to sell the securities that they have accumulated in the absence of any significant near-term upside,” the senior trader, who is not authorised to speak to media, said.
Indian banks have been heavily investing in debt in the absence of growth in their loan book. As on May 26, the lenders have invested Rs 35,61,747 crore in SLR (statutory liquidity ratio) securities and corporate bonds, higher than Rs 33,92,399 crore at the beginning of the fiscal, data from the RBI showed. Growth in non-food credit fell to 5.86% year-on-year (y-o-y) during the fortnight ended May 26 from 9.65% a year ago, according to RBI data.
Some of the state-run lenders have invested heavily in government securities in the past one week in the hope of selling the securities at a higher price, the head of treasury at a large public-sector bank said.
In addition to the selling pressure from the state-run lenders, the demand from the FPIs is likely to taper off as they have utilised most of their debt purchase limit, which will keep the rally in bonds in check, traders said. According to depository data, FPIs have utilised 89.88% of the limit for government securities. For corporate bonds, the utilisation limit stands at 90.26%. Traders said the remaining 10% of the limits is likely to be auctioned either this week, or latest by next week.
Foreign portfolio investors have bought $20.4 billion worth of Indian debt in 2017, data from NSDL showed.
In June, they have bought bonds worth $2.3 billion. The large purchases by the foreign investors have been a key factor for the rally in the Indian bond market.