Indian Bonds to Extend Rally on Prospect of Lower CPI, Rate Cuts

(Bloomberg) -- The bull run in India’s sovereign bonds is set to continue as inflation peaks, providing the central bank with room to resume rate cuts.

Domestic investors have led a charge into government debt since mid-December that’s pushed benchmark 10-year yields down more than 60 basis points, as the Reserve Bank of India kept them flush with funds through aggressive liquidity operations.

Governor Shaktikanta Das indicated last week that rate cuts are back on his mind as Indian policy makers join peers around the world in bolstering their economic defenses against coronavirus. While the country’s benchmark 10-year yield is now down around 6.19%, it is still the second-highest in Asia’s major markets and about eight times the level of U.S. Treasuries.

“The bond market’s enthusiasm is quite palpable,” said Lakshmi Iyer, chief investment officer for fixed income at Kotak Mahindra Asset Management Co. in Mumbai. “Expectations for incremental rate cuts or more fund injections through unconventional measures will support the positive bond market sentiment.”

As India’s consumer price index spiked above the RBI’s 2-6% target range late last year, the RBI was forced to bring rate cuts to a halt. Das turned the focus to Federal Reserve-style “Operation Twists” and Longer-Term Refinancing Operations pulled from the European Central Bank’s playbook.

Investors expect these to continue, coupled with rate cuts if inflation data due Thursday confirms an expected slowdown in CPI gains.

Thanks in part to a bumper winter harvest that damped food prices, Bloomberg Economics estimates inflation to have eased by around a full percentage point in February.

If that proves right, bonds are primed to extend their gains.

Iyer at Kotak Mahindra and Dushyant Padmanabhan of Nomura Holdings Inc. in Singapore are among those who see yields falling.

Below are the region’s key economic data and events due this week:

• Monday, March 9: Japan revised GDP, current account data; Taiwan trade; Singapore FX reserves; Indonesia consumer confidence
• Tuesday, March 10: China CPI, PPI, credit, money supply; Australia business confidence; Philippines trade; speech by RBNZ Governor Orr
• Wednesday, March 11: South Korea unemployment; Australia consumer confidence, speech by RBA deputy governor Debelle
• Thursday, March 12: India CPI, industrial production; Japan PPI, foreign bond buying
• Friday, March 13: Malaysia industrial production; Thailand FX reserves; Philippines budget balance

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, Brett Miller

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