Rate cut expectations, foreign demand boost govt bonds to 2016 highs

Sovereign Indian debt streaked ahead, sending benchmark yields to 30-month lows, amid growing expectations of deeper rate cuts by the Reserve Bank of India and increased foreign demand.

The yield on 10-year bonds declined nine basis points to 6.34 per cent on Tuesday after touching 6.31 per cent, the lowest for the notes since December 2016. Yields have slid more than 100 basis points since April-end amid bets the central bank may add to its three rate cuts this year. And negative-yielding debt in much of the developed world is adding to the allure of high-yielder like India, traders said.

“Indian bonds are facing a dream-like situation, given strong demand from foreign and local investors,” said Anoop Verma, vice president for treasury at DCB Bank in Mumbai. “Yields are headed south and where they will stop is a million dollar question.”
 

Verma said he expects 10-year yield to drop further to 6 per cent amid expectation that the central bank will lower rates by another 50 basis points this year.

Other factors fueling demand for rupee bonds are:

• Retail inflation remains below RBI’s 4 per cent target

• The government’s plan to tap the offshore debt market has eased concerns about excess supply from its record domestic borrowings

• Banking liquidity has turned surplus, adding to demand for bonds

• Foreigners bought about $1.1 billion of bonds this month, taking inflows for the year to $2.5 billion