10-year bond yield may touch 7.40% by end December: BS Poll

The yield on the 10-year bond was last at around these levels on June 20, 2013 at 7.38%

With a sharp cut in the policy rate by the Reserve Bank of India (RBI) on September 29 and a rise in the investment limit for foreign portfolio investors (FPIs) in government securities, the fall in government bond yields is likely to continue. According to a poll of 10 experts by Business Standard, the yield on the 10-year benchmark government bond will stand at 7.4 per cent by the end of December.

The last time the yield was at similar levels was June 20, 2013 (7.38 per cent).

“The overall macro environment looks very supportive for bond yields to fall further. However, there might be some short-term profit-booking from investors. Besides, October-to-December bond supplies are also reasonable (including the state development loans calendar). From here, the decline in yields will be gradual,” said Suyash Choudhary, head (fixed income), IDFC Mutual Fund.

On Tuesday, the yield on the 10-year benchmark bond ended at 7.53 per cent. In the past week, it has dropped 20 basis points. On Tuesday, the yield ended two basis points higher compared with its previous close of 7.51 per cent, owing to due to some profit-booking by traders.

At its fourth bi-monthly monetary policy review meeting on September 29, RBI had cut the repo rate (at which banks borrow from the central bank) by 50 basis points to 6.75 per cent, against market expectations of a 25-basis-point cut. The central bank also said the limits for FPI investment in the central government securities would be increased in phases to five per cent of the outstanding stock by March 2018.

Some experts say the benchmark bond yield could fall to less than 7.4 per cent. “There would be a continued fall in inflation, which will give comfort to RBI to cut the rate further. Markets will factor in the rate cut much in advance, before the rate cut actually happens. The next rate cut might happen between February and March,” said Badrish Kulhalli, fund manager (fixed income) at HDFC Life.

However, some fear yields might stabilise around current levels. “Between now and December, there will be one RBI monetary policy review, in which I expect the repo rate to be maintained at these levels. On the inflation front, the base effect is wearing off, due to which inflation might be slightly higher,” said S P Prabhu, head of fixed income at IDBI Federal Life Insurance.

At its monetary policy review, the central bank had said inflation was likely to rise for a few months, as a favourable base effect reversed. It added Consumer Price Index (CPI)-based inflation was expected to stand at 5.8 per cent in January 2016.

Data showed CPI inflation declined to a nine-month low of 3.66 per cent in August from 3.69 per cent in July.