Easing rates may pull down India 10-yr yield to 6.75%, short-term set for bigger falls - PNB Gilts exec

PNB Gilts

05/01/2024 09:27

By Dharamraj Dhutia
       MUMBAI, Jan 5 (Reuters) - The expected easing in India's
monetary policy could drag the benchmark 10-year bond yield by
around 50 basis points in the coming months, while shorter-end
debt could see sharper falls, resulting in a steepening of the
yield curve, a treasury official from PNB Gilts said.
    The 10-year bond yield  IN10YT=RR  is expected to hit 6.75%,
with the five-year yield  IN5YT=RR  easing to 6.45%-6.50% as
falling interest rates aid the shorter duration more, said Vikas
Goel, managing director at the primary dealer.
    "In fact, the front-end would be the most sensitive to
changes, and the 364-day Treasury bill yield could ease to
around 90 bps to reach 6.25% levels," the treasurer said.
    The five-year 7.37% 2028 bond yield  IN073728G=CC  was
around 7.09% on Friday, while the benchmark 7.18% 2033 yield
 IN071833G=CC  stood at 7.23%. The 364-day T-bill was sold at
7.13% earlier this week. 
    Goel expects the Reserve Bank of India (RBI) to opt for a
three-pronged approach to manage interest rates, starting with
easing of banking system liquidity, followed by a change in
stance, and ultimately reducing the repo rate. 
    He, however, does not expect the repo rate to decline by
more than 50 bps as liquidity infusion would aid the process of
easing rates.
    The first step in easing policy would be to reinstate
liquidity by moving it into the surplus mode from a deficit, and
this would be an effective rate cut of 50 bps as overnight rates
would drop to the 6.30%-6.35% zone, Goel said.
        The rate cut would then take the lower-end of the policy
corridor to 5.75% from 6.25% currently, and overnight rates to
the 5.80%-5.85% band. Hence, the overall impact of liquidity
infusion and cuts would lead to 100 bps of easing, he added.
  
    Indian overnight rates stayed above the Marginal Standing
Facility rate of 6.75% from October to December, averaging
around 6.85% on tight liquidity days. 
    The RBI has not conducted its regular 14-day variable rate
reverse repos for the last two fortnights, while consistently
infusing funds through short-term cash infusions over the last
few weeks. 
    In terms of the timing of rate cuts, Goel said the RBI may
opt for the first one three months after the U.S. Federal
Reserve starts its easing cycle. 

 (Reporting by Dharamraj Dhutia; Editing by Sonia Cheema)
 ((Dharamraj.Dhutia@thomsonreuters.com;))