Treasury Head at Top Indian Bank Abandons Bullish Bond Bias

(Bloomberg) -- India's largest bank is turning more cautious on its bond investments, surprised by the hawkish minutes of the Reserve Bank of India's latest policy meeting.

“I was neutral with a bullish bias earlier, now I am just neutral,” C. Venkat Nageswar, Mumbai-based deputy managing director and treasury head at State Bank of India, said in an interview. The minutes “were more hawkish than expected,” with the stance taken by a couple of members being “a surprise for us,” he added.

The yield on India's benchmark 10-year sovereign bonds jumped to 6.95 percent on Wednesday, its highest close since September. That's after minutes of the RBI's April 5-6 meeting released last week showed policy makers expressed concerns about inflationary pressures, with one of the six panel members even suggesting a pre-emptive increase in the key repurchase rate.

Nageswar predicts the 10-year yield, which was at 6.94 percent in Mumbai Friday, to range between 6.80 percent and 7.10 percent till September. That compares with his band of 6.70 percent to 6.95 percent, with a bias toward 6.70 percent, before the release of the minutes. The yield will drop to 6.85 percent by September, according to the median estimate of economists surveyed by Bloomberg News between April 21 and April 26.

“There is reason for us to be more careful on yields,” Nageswar said, adding that he is now a little less confident that the central bank won't increase rates by December. “The strategy is premised on bond markets not giving easy profits from falling yields. We would still be looking at the shorter end, but now we would need to be more opportunistic in terms of timing the purchases.”

Read: Short Is Sweet in Rupee Bonds as Supply Flood Hits Longer Debt

The RBI panel unexpectedly raised the reverse repurchase rate earlier this month while keeping the main repo rate unchanged, effectively tightening policy by making overnight borrowings expensive. That followed February's surprising change in the authority's stance from accommodative to neutral as it signaled an end to the easing cycle that began in early 2015.

Yield Attraction

The RBI's steps have come as authorities seek to rein in liquidity after the government's November recall of high-value currency notes flooded the banking system with cash. The surplus funds risk intensifying price pressures and imperiling the central bank's 4 percent target set for the medium term. The next rate decision is on June 7.

Nageswar said he expects the benign cash conditions and demand from yield-hungry foreign investors to provide support to bonds. Overseas funds boosted holdings of local government and corporate debt by 360 billion rupees ($5.6 billion) between January and March, helping the rupee surge 4.7 percent to cap its biggest first-quarter gain since 1975.

“I haven't turned bearish,” Nageswar said. “There is additional demand from banks, as well as from foreign investors, for whom a strong and stable rupee makes Indian debt very attractive at these levels.”

--With assistance from Cynthia Li

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, Shikhar Balwani