India 10-yr bond yield to dip on high chance of RBI stance change -PNB Gilts' Goel

PNB Gilts

02/02/2023 08:23

By Dharamraj Dhutia
       MUMBAI, Feb 2 (Reuters) - India's benchmark bond yield
could break the key 7.25% handle due to the high likelihood of
the central bank changing its policy stance to neutral after
hiking interest rates once last time next week, the top official
of PNB Gilts said on Thursday.
    However, the Reserve Bank of India will have to resume its
bond purchases next financial year to ensure a smooth completion
of the government's borrowing programme, said Vikas Goel,
managing director and chief executive officer of PNB Gilts.
    "There is a very high probability of the central bank hiking
rates and changing its stance to neutral. And, if this happens,
the benchmark bond yield may test 7.10%-7.15% levels," he said.
    The RBI has raised the repo rate by 225 basis points since
May 2022, to fight inflation, which finally came within its
tolerance range in the last two months of 2022.
    The central bank is expected to hike rates by 25 basis
points (bps) at its next meeting on Feb. 6-8, but the key for
the market will be officials' stance on the terminal rate.
    "Till then, the technical level of 7.25% is unlikely to be
broken," said Goel.
    The benchmark 7.26% 2032 bond yield  IN072632G=CC  was last
at 7.27%, down 13 bps from recent highs as the government's
gross borrowing target of 15.43 trillion rupees ($188.43
billion) for the next fiscal was lower than estimates of 16
trillion rupees.
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    Goel also expects demand from insurance companies, which has
supported long-tenor bond yields, to slow next fiscal due to
weaker inflows, meaning the central bank will have to step in to
absorb supply.
    "In the absence of a new set of buyers, the RBI will have to
absorb at least two trillion rupees to three trillion rupees."
    The RBI stopped bond purchases in October 2021 when it began
rolling back pandemic-era stimulus measures. In fact, the
central bank has net sold bonds worth 334 billion rupees in the
secondary market so far this fiscal.
    The government, on Wednesday, announced taxes upon maturity
of certain high-value life insurance policies issued from April
onwards.
    That move, combined with the government's push towards
filing personal income tax returns under a new regime, in which
premiums on insurance policies are not deductible, could limit
the inflows into insurance schemes.
    "Insurance companies bailed out government bond supply in
the current year. But for the next year, we do not see any value
for bonds above the 10-year part of the curve," said Goel.
    "The curve will start steepening from the 10-year point once
fresh supply starts."
    The 14-year 7.41% 2036 bond yield was last at 7.36%, while
the 30-year and 40-year bond yields were around 7.37%.
    Goel expects the yields of 10-year-plus bonds to start
rising from April, but said the five-year to 10-year part of the
curve may be "relatively protected".
 
 ($1 = 81.8870 Indian rupees)
 (Reporting by Dharamraj Dhutia; Editing by Savio D'Souza)
 ((Dharamraj.dhutia@tr.com))