(Bloomberg) -- The rally that saw Indian sovereign bonds post their best quarterly gain in four years may have it limits as the central bank is unlikely to embark on a series of interest-rate cuts, according to the nation's oldest mutual-fund company.
Cheaper oil and a new central bank governor widely seen to have a dovish bent helped local bonds and the rupee rebound from a selloff toward the year-end. The sustainability of those gains is in doubt amid concern that the government may bust its fiscal-deficit target by boosting spending before this year's national election.
“Markets as usual always price-in moves ahead of the actual events and if you see a rate cut, the market may not rally much further,” said Amandeep Chopra, head of fixed income at UTI Asset Management Co., which oversees about $22 billion. “The best you can expect from the Reserve Bank of India are shallow cuts, not the start of an easing cycle.”
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The yield on 2028 bonds, the most traded, hit an eight-month low of 7.21 percent last month as falling oil prices eased worries about inflation in the world's fastest-growing oil user. The optimism is waning amid reports of the government considering cash handouts to appease farmers -- a key voting block -- before elections due before May.
The yield rose as high as 7.54 percent on Tuesday, extending a 6-basis point gain in the previous session. It is likely to hover in the 7.25-7.50 percent range by end-March, Chopra said.
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UTI Asset prefers short-term debt over long-tenor paper because it doesn't expect the RBI to aggressively ease its monetary policy.
“With an expectation of shallow rate-cut cycle to benign interest-rate outlook, we prefer to be in the liquid segments -- the 5-, 7- and 10-year bonds,” he said. “It's time to exercise a bit of caution.”
Here are other comments from the interview:
On long-tenor government debt:
- “Going long on the 20-, 30-year government bonds will depend on the longer-term inflation outlook and whether we're looking at a sustained easing cycle or just a shallow one.”
- “If the RBI cuts rates and renews expectations of one more down the line, then there could be a reason for bonds to rally.”
On company bonds:
- Corporate bonds “will face a bit of a challenge. Barring traditional investors like pension funds and insurers, mutual funds are not so active as they are not adding duration in the current environment.”
On oil prices:
- “Oil remains the joker in the rates outlook. If prices were to jump by $10 dollars, the positivity may need to be reassessed.”
- “You could see range bound markets if oil stays below $56. What helps us is that the average cost of crude would be much lower than what it was in 2018.”
To contact the reporter on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Ravil Shirodkar, Anto Antony
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