Shorter Indian Bonds Set To Extend Gains On RBI’s Record Payout

India’s shorter-tenor bonds are set to extend their outperformance as analysts expect the central bank’s record dividend payout will further boost the cash surplus in the banking system. 

The Reserve Bank of India approved a record dividend payout of 2.69 trillion rupees ($32 billion) on Friday. This payout is expected to boost liquidity for lenders as the government utilizes the funds for expenditure. Nomura Holdings Inc. anticipates the yield curve to steepen further, with the spread between 5-year and 10-year government bonds likely widening to around 50 basis points from the current 34 basis points.

“We expect this steepening trend to continue, and prefer to be long five-year bonds,” said Nagaraj Kulkarni, co-head of Asia rates (ex-China) at Standard Chartered Plc in Singapore.

Indian shorter-maturity bonds have outperformed longer notes on expectations a large dividend payout will likely prompt the RBI to cut down on its open-market debt purchases, which have focused mainly on longer-duration securities. IDFC FIRST Bank Ltd. now expects additional purchases of 1.6 trillion rupees to be pushed back to the fiscal second half.

The yield on the five-year note has declined more than 50 basis points since April 1, outpacing the 33 basis-point decline on the 10-year note. 

Still, not all are convinced that the outperformance will extend. Bandhan AMC Ltd.’s head of fixed income Suyash Choudhary predicts the steepening may have run its course and the duration segment may relatively perform better. 

Banking liquidity swung to a surplus of 1.6 trillion rupees as of Friday, from a deficit of as much as 3.3 trillion rupees earlier in the year, driven by the RBI’s debt purchases that have exceeded its Covid-era levels.

The dividend payout will push core liquidity, which includes the government’s cash balances, to a five-trillion-rupees surplus, according to Nomura.