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

India’s Benchmark Bond Yield Could Move Back Towards 7%, Says Nomura

Lower government borrowings, comfortable inflation and an increased limit for foreign purchases could push India’s benchmark bond yield back towards 7 percent.

Bond yields had surged between September and mid-March on concerns that bond supply would outstrip demand and the Indian central bank would raise rates. Both those expectations have now turned, allowing for a fall in yields. The 10-year bond yield has fallen from a peak of 7.76 percent on March 3 to 7.15 percent on Monday.

“Near term our expectation is for a range of 7.05-7.25 percent but based on the inflation trajectory, if inflation continues to remain benign, I will not be surprised to see the 10-year yield closer to 7 percent in a month or so,” said Nomura’s rate strategist Vivek Rajpal in an interview to BloombergQuint.

On Friday, the Reserve Bank of India increased the foreign investment limit in central government bonds and corporate debt. The limit in central government bonds will be increased to 5.5 percent of outstanding stock in the current financial year and 6 percent by the end of the next financial year. The overall limit for FPI investment in corporate bonds will be fixed at 9 percent of the outstanding stock, the central bank said. Together, the increased limits will allow for additional purchases of government and corporate debt of upto Rs 1 lakh crore this financial year.

“The increase in foreign investment limits could further act as a catalyst in bond market momentum. However, actual flows would be a function of evolving global risk appetite,” said economists at Kotak Economic Research in a note on Monday. Kotak expects the 10-year bond yield to range between 7-7.4 percent in the first half of the fiscal year.

The increase was on the “lower side of expectations” and should be “treated neutral by the markets”, Rajpal said but added that all recent developments put together should correct the technical supply-demand imbalance that existed in the market. “First half borrowing supply absorption should not be a problem,” he said.

The first government bond auction for the current financial year went through smoothly on Friday with demand well ahead of supply. For the Rs 3000 crore in 10-year benchmark bonds up for auction, the RBI received bids of over Rs 12,000 crore. Other bonds up for auction were also bid amounts well above the securities on offer.

The government will borrow Rs 2.88 lakh crore in the first half of the current fiscal, lower than the Rs 3.72 lakh crore last year.