India's short-dated bonds will outperform debt with long duration, as the central bank is expected to keep interest rates on hold and banks are set for a large cash surplus, according to traders.
DBS Bank Ltd. and Trust Asset Management Pvt. see the yield curve steepening further after the gap between 30-year and five-year yields widened to more than 100 basis points following the Reserve Bank of India's June 5 measures to boost capital flows.
The steepening may continue on attractive carry and an influx of rupee liquidity from the RBI's steps to attract overseas deposits, said Sameer Karyatt, head of trading at DBS Bank India. “The possibility of higher global interest rates driven by inflation concerns is likely to limit any significant decline in longer-tenor yields.”
The trade reflects a global trend, with the US yield curve sharply steepening after the Federal Reserve held interest rates steady last week. As concerns over inflation and government borrowing pressure longer-dated yields, investors are favoring shorter maturities that are less exposed to swings in rate expectations.
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The RBI is likely to keep rates steady in its decision due Aug. 5, according to most economists in a Bloomberg survey, even as many of its peers have tightened the policy in recent months. While the rupee is one of the worst-performing Asian currencies this year, the central bank has preferred to stabilize it by attracting dollar inflows instead of rate hikes.
The RBI move, which has already brought in more than $40 billion, will help boost rupee liquidity as the dollars are swapped with the central bank. Foreign inflows under the program, estimated at $75 billion, are expected to increase core liquidity to 10 trillion rupees ($105 billion) by December, against 5 trillion rupees at end-June, according to QuantEco Research.
The yield on the five-year bond has fallen 35 basis points to 6.45% since the RBI and government unveiled steps to boost inflows, while it's down 17 basis points to 7.47% on the 30-year debt.
Yields are expected to rise on Monday after Bloomberg Index Services Ltd. deferred adding the nation to its widely tracked global aggregate index. The index provider said that investors needed more time to implement the enhancements taken by authorities across all geographies.
Bloomberg LP, which offers index products for various asset classes through BISL, is also the parent company of Bloomberg News.
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The yield-steepening trade may run its course, with the RBI's concessional deposit swap window set to close at the end of this quarter, according to Murthy Nagarajan, head of fixed income at Tata Asset Management. “Short-end yields may move up after September when the window gets closed and expectations of rate hike start getting priced in the market,” he said.
For now, recent comments by RBI Governor Sanjay Malhotra that policymakers don't yet see signs of inflation becoming broad-based are reinforcing expectations that the central bank will remain in wait-and-watch mode on Wednesday.
Swap rates are pricing in 50-75 basis points of RBI rate hikes in the current cycle, but the first one is still three to six months away, according to Sandeep Bagla, chief executive at Trust Asset Management.
“The curve can steepen more as domestic liquidity would most likely be deployed in shorter-term assets due to asset-liability management banks,” he said.
This week's main economic events:
- Monday, Aug 3: PMI manufacturing readings across Asia; New Zealand building permits; Indonesia exports, CPI
- Tuesday, Aug 4: South Korea CPI
- Wednesday, Aug 5: New Zealand unemployment rate; Philippines CPI, Indonesia GDP; RBI rate decision; BOJ minutes
- Thursday, Aug 6: South Korea current account; Australia trade balance; Thailand and Taiwan CPI
- Friday, Aug. 7: Philippines GDP; China exports; India, China, Thailand, Indonesia to report reserves
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
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