India's sovereign bond rally to spread on deeper easing, says ICICI Prulife

By Bhaskar Dutta and Subhadip Sircar

 

ICICI Prudential Life Insurance is bullish on longer-term Indian sovereign bonds as tariff-related uncertainties may signal a deeper interest-rate-cut cycle by the central bank than previously expected.

 

While the 10-year bond has outperformed in the recent debt-market rally, longer-end bonds will now “play a catch-up game,” Vidya Iyer, head of fixed income at the insurance firm which manages more than $35 billion in assets, said in an interview. She has “positioned a part of the portfolio in 15-year and 20-year-and-above bonds.”

 

Earlier this month, the Reserve Bank of India cut interest rates, as expected, and signaled more to come as it seeks to bolster Asia’s third-largest economy in the face of damaging US tariffs. The central bank has also undertaken massive liquidity injections which have translated into deeper easing by pushing market rates below the policy rate. Below-target inflation and lower oil prices provide room for even more rate reductions, further improving the appeal of longer-term debt. 

 

 

Yet, yields on 30-year and 50-year bonds have dropped 15 basis points each this month — compared with a decline of about 24 basis points on the 10-year bond, which recently fell to fresh three-year lows.

 

Spreads “have a lot of room to compress” Iyer said. She expects a half-point more of cuts by August, with the possibility of a deeper easing cycle depending on how India’s economy is affected by tariffs.

 

“We expect the 10-year government bond to trade close to 6% over the next couple of quarters,” she said, which would imply a fall of more than 35 basis points from current levels.

 

Iyer also remains invested in five-year and 10-year bonds that would provide much-needed liquidity during episodes of market turbulence, as she sees volatility remaining elevated in coming months.