Mumbai: The slide in Indian bonds last month on concern about potential monetary stimulus has one bond veteran smelling an opportunity.
The government’s scope to deliver a big package to revive the economy is limited despite the $24 billion windfall from the central bank, while the prospect of additional interest-rate cuts will drive yields lower, Neeraj Gambhir, president and head of treasury and markets at Axis Bank Ltd., said in an interview.
Concern potential stimulus would worsen the fiscal deficit caused benchmark yields to jump the most in 16 months in August. While Finance Minister Nirmala Sitharaman has resisted calls to offer fiscal support, traders fear last month’s economic data showing growth slumped to a six-year low may convince the administration to capitulate.
“We will see some more rate cuts happen, we will see liquidity continue to be good and that should steadily drive down yields,” said Gambhir, who has more than 20 years experience in the nation’s bond market, including being managing director and head of fixed income at Nomura Fixed Income Securities India. The government may opt for “targeted intervention” to boost demand rather than unveil a large revival package, he said.
Gambhir said the premium of 10-year yields over the central bank’s policy rate signals that bonds are attractive. The gap is currently about 120 basis points after the Reserve Bank of India (RBI) cut rates four times this year in Asia’s most aggressive monetary easing.
“At this stage of the cycle, the spread flattens out quite a lot,” he said. “From that perspective, duration in government bonds is a good play.”
Interest-rate swaps are signaling the central bank will eventually cut its repurchase rate to as low as 4.75% or 5%, from the current 5.4%. Assuming the terminal rate will be 5%, that means the 10-year bond yield may decline to 6%, factoring in a “fairly wide” 100 basis-point spread, Gambhir said.
The nation’s 10-year yield closed 3 basis points higher Friday at 6.60%.
The central bank has been emboldened to keep cutting rates as inflation has stayed below its 4% target for 12 straight months. Data for August is due this Thursday.
There’s also room for spreads between highly-rated corporate issuers and sovereign notes to shrink, Gambhir said.
“As liquidity in the system persists and interest rates settle at a lower level, spreads would tighten, especially for high-quality borrowers,” he said. “But that yield-chase cycle hasn’t begun.”