Bond Rally in India May Be as Good as It Gets, IDFC Asset SaysBy
‘Bull flattening’ of curve probably over after recent gains
Lifting cap for foreigners may not automatically boost demand
The rebound of India’s bonds from a seven-month selloff may have its limits, according to IDFC Asset Management Co., which manages 716.5 billion rupees ($11 billion).
Sovereign debt rallied the most since 2013 last Tuesday after the government surprised traders by paring fiscal first-half borrowings. They extended gains when the central bank six days later allowed lenders to spread out bond-trading losses in a bid to revive demand. Before that, the market was in its longest run of loss since 1998.
While there are signs the pall over the market is lifting, the sustainability of the rally will depend on the government’s borrowing for the second half, revenue collections and inflation data, said Suyash Choudhary, head of fixed income at IDFC Asset. Demand from state banks, whose debt holdings already exceed the statutory requirement, will be key in determining the trajectory for bond yields, he said.
“Bulk of the bull flattening seems to be over, there may be more of a parallel move from here on,” Choudhary said in an interview. “With the revised borrowing calendar and with the support from near CPI prints, the top end of the market in terms of yields seems to be in place.”
Yield on the 10-year bonds declined 33 basis points in March to end at 7.4 percent, its first monthly drop since July. The benchmark will probably remain in a range of 7.20 percent to 7.45 percent in the June quarter, Choudhary said.
For yields to drop below the lower end of this band there needs to be a clear indication that appetite for duration is returning, he said. “Specifically, one must see banks coming back to the market in some fashion,” he added.
State banks, the biggest holders of sovereign debt, were scarred by the rout. They have been net sellers of an average 6.59 billion rupees every day this year, data from the Clearing Corp. of India show. They bought an average of 368 million rupees daily in 2017.
Of course, the recent rally may extend if the Reserve Bank of India starts purchasing bonds from the open market, Choudhary said.
While the RBI is expected to keep interest rates unchanged at its policy review on Thursday, some traders expect the central bank to support the recent bond gains by further opening up India’s market to foreigners. Currently, global funds can own as much as 5 percent of government debt.
Even so, higher limits may not automatically lead to more demand, Choudhary said.
“One cannot assume any more that the entire FPI limit on offer will get taken because, unlike last year, the underlying environment for bonds is not as conducive globally,” he said. “Last year, there was a big hunt for EM bonds, including India. The extent of the off-take may be more gradual.”