RBI eases its hawkish stance, index addition to extend market bond rally

By Malavika Kaur Makol, Subhadip Sircar and Ronojoy Mazumdar

It looks like there’s no stopping the rally in India’s bonds, already the best performers in Asia this year.

The Reserve Bank of India eased its hawkish stance and FTSE Russell added the nation to its emerging-market debt index on Wednesday, moves which are set to lure more foreign inflows and help extend a rally in bonds, according to analysts. 

Ten-year bonds advanced the most since February, with the yield falling as much as seven basis points to 6.74 per cent on Wednesday. The rupee traded little changed, while the benchmark NSE Nifty 50 index extended gains to 0.9 per cent. 

Indian bonds handed investors a gain of more than 8 per cent this year, thanks to about $16 billion of foreign inflows spurred by an earlier inclusion into JPMorgan Chase & Co.’s index.  

Here’s what market participants had to say: 

More foreign inflows:

RBI should cut rates in the December meeting and bring the repurchase rate to 6 per cent by first quarter of 2025, says Michael Wan, senior currency analyst at MUFG Bank

• “As long as the upside risks to inflation do not materialize, the path of least resistance should be for a rate cut, albeit a shallow one”
• FTSE’s inclusion of India should add some incremental bond inflows to India, and highlight how India still remains attractive and under-owned among global investors
• Strong capital inflows for India together with RBI foreign-exchange intervention are reasons why we believe that the rupee’s volatility can remain low and sharp spikes are unlikely
• But, the rupee should still underperform as the dollar weakens with a reasonably sticky current-account deficit

Yields seen heading lower 

The RBI has given themselves an option to cut rates which is comforting, says Naveen Singh, head of trading at ICICI Securities Primary Dealership Ltd. The central bank may cut rates by February possibly, with the 10-year yield moving lower to 6.65 per cent by year-end

• “Given they held back for so long on the stance, to change now, clearly they will know that will signal a cut is coming in December,” Nathan Sribalasundaram, rates strategist at Nomura Holdings Inc in Singapore
• “The market hadn’t fully baked in a December cut. Given the selling last week, positioning in Indian government bonds looks cleaner. We continue to expect yields to drift lower to 6.50 per cent by the end of the year”

Long two-year bond recommendation

India’s inclusion into FTSE’s index is not likely to directly translate into significant passive inflows into India’s bond market, write Goldman Sachs analysts Danny Suwanapruti and Andrew Tilton

• However, the broader improvement in market access as well as trading/settlement procedures should attract inflows into India’s bond market organically (non-index related)
• The rupee offers an attractive carry-to-vol profile versus EM peers, and the RBI is expected to start its easing cycle soon. As such, foreign investors will be naturally attracted to rupee local markets with improved market access helping to aid more inflows
• Company maintains its recommendation to buy two-year India government bond trade and has just revised its stop-loss lower to 6.85 per cent to protect gains. It is targeting 6.5 per cent

Large easing cycle

• There is a likelihood of 50 to 100 basis points of rate cuts by next year, says Pankaj Pathak, fixed-income manager at Quantum Asset Management Co.
• Inflation will most likely next year be in the 3 per cent handle if there is no shock
• This clearly opens up the room for rate cuts even in December, compared with a previous expectation of a move only in February. There is some rethinking apparently within RBI either because of the global rate-cutting cycle or the new members

Delayed rate cuts

RBI may delay the rate cut to the first quarter of next fiscal year until crude and commodity prices ease a bit, says Shrisha Acharya, vice president for Treasury at Anand Rathi Global Finance

• Swaps are pricing in a cut from the first or second quarter of the next financial year
• “Undertones has changed to a certain bullishness, if inflation is under control, we can see a rate cut sooner”
• “I don’t see yields touching the 6.85 per cent level again. If it comes, there will be strong support. From here on it should hold around 6.65 per cent to 6.80 per cent”