Bond yields could head towards 6.5% by the end of March next year from the current levels of 6.7%, treasurers believe, especially given that chances of another cut in the repo rate, following Tuesday’s cut of 25 basis points, are high.
Bonds rallied smartly on Tuesday, with the yield on the 10-year benchmark bond falling by over 4 bps to close at 6.73%. Yields have been trending down since June this year — they have fallen by approximately 60 basis points since June — and have fallen more than 10 bps since September 19.
“Bond yields are definitely headed down. We could see the 10-year testing 6.55%-6.60% levels post the US elections, which is the next stop,” said Jayesh Mehta, MD and Country Treasurer, Bank of America.
Ananth Narayan, regional head of financial markets for ASEAN & South Asia of Standard Chartered Bank, believes there is room for yields to come down. “That’s our base case given the real rate is moving down and the hard 4 % is being replaced with the mandate of an inflation target of 4% plus minus 2%,” Narayan observed.
“Moreover, liquidity is expected to be comfortable given the RBI has already achieved neutrality and more than compensated for FCNR(B) outflows,” he added.
Market participants are convinced there is room for one more rate cut in FY17. “The RBI’s decision, although expected, was an indicator that it is comfortable with where inflation is. I know that they said there is an upside risk to the inflation target, but that is always the case in India,” Ashish Parthasarthy, Treasurer at HDFC Bank, told FE.
“If the numbers favour, we might definitely see another rate cut this year, possibly as early as December,” Parthasarthy said.
Ajay Manglunia, head of fixed income at Edelweiss Finance, said he sees the 10-year benchmark yield settling at around 6.50% by the end of March. “There is certainly a possibility of one more rate cut by then given that 25 bps is already done now,” Manglunia said.
Manglunia added that although the central bank said that there were upside risks to its inflation target of 5% by the end of FY17, inflation is already around the 5% level and the recently-concluded healthy monsoon would help in keeping prices down.
Another positive of Tuesday’s monetary policy review seems to be the central bank’s shift in focus to growth and inflation together instead of just inflation.
“It is a big change from what was happening and that is the whole point of having a monetary policy committee,” Kartik Srinivasan, senior vice-president at rating agency ICRA, said.