Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Feel-Good on India Bonds May Prove Elusive as Oversupply Looms

(Bloomberg) -- Bonds traders were quick to cheer India’s central bank for providing the embattled market some respite by holding on to its neutral stance and suggesting that inflation may slow.

Not so fast, some analysts are saying. Wednesday’s gains won’t endure until the Reserve Bank of India deals with the debt oversupply that lies at the heart of a six-month selloff.

“Traders can heave a sigh of relief, but there is no cause for celebration,” Vijay Sharma, executive vice president for fixed-income at PNB Gilts Ltd., said from New Delhi. “The RBI has to find a solution by starting to purchase bonds and raising limits for foreigners, else after a brief period, this problem will come back to haunt the market.”

Feel-Good on India Bonds May Prove Elusive as Oversupply Looms

The yield on benchmark 10-year bonds fell 4 basis points Wednesday. The central bank’s inflation forecast of 4.5 percent to 4.6 percent for the second half of the fiscal year starting April 1 was seen as benign by traders who had expected the RBI to be more hawkish because of elevated oil prices. It sees prices gaining 5.1 percent to 5.6 percent in the first six months.

Sharma expects the 10-year yield to be between 7.42 percent to 7.65 percent in the next couple of weeks.

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