India's sovereign bond yields may drop to lowest since 2009: Deutsche Bank

Deutsche Bank AG is predicting a big decline in India’s sovereign bond yields to levels last seen in 2009.

The yield curve is pricing in a deeper trough on policy, with expectations of more rate cuts from the Reserve Bank of India and a change in the way the authority manages liquidity to help transmit lower borrowing costs through to the economy, strategists including Sameer Goel wrote in a note.

“The rates narrative in India has the support of strong tailwinds from policy, liquidity and technicals,” they wrote.

Sovereign bonds have rallied in India, with the 10-year yield falling to its lowest since 2017, after the government surprised markets by trimming the budget deficit target for this fiscal year from its estimate in February, and shifting a part of its market borrowing overseas. The RBI has cut rates three times this year amid a subdued inflation outlook and sluggish growth.

The average spread of the 10-year yield over the RBI’s policy rate was about 55 basis points during the 2015-2017 easing cycle, and even contracted to zero in 2016, according to the strategists. The yield fell five basis points to 6.44% on Monday, paring the gap to 69 basis points.

The benchmark yield may decline to 6% by end-2019, and further to 5.75% by end-March, according to the note. The median forecast in a Bloomberg survey stands at 7.10% by year-end, and 7.18% by March 2020.

Investor concerns about slowing global growth and expectations for an easing in monetary policy from the world’s largest central banks has sent bond yields tumbling in many countries. The 10-year U.S. Treasury yield touched a 2 1/2-year low earlier this month.

Deutsche Bank’s forecast assumes that the current benign backdrop for bonds continues, the market’s pricing of 50 basis points of rate cuts by the RBI is realized and technicals remain underpinned by sovereign external issuance and foreign inflows, the strategists wrote.