Higher government borrowing is expected to push up India’s benchmark 10-year bond yield, while the Indian rupee could see a sharp depreciation by the end of the current fiscal, said a rate strategist at UBS.
“For the end of the fiscal year, we estimate the 10-year India bond yield to be around 7.50%,” Rohit Arora, senior emerging markets forex and rate strategist at UBS Global Research, told news agency Reuters.
“During the next few months, we expect the demand-supply imbalance to re-emerge in the debt market,” he added.
He didn’t see much value in entering the Indian bond market A combination of a “somewhat increased supply burden” at current levels and a reduction in demand for banks propped up yields.
India’s benchmark 7.26% 2032 bond yield It was 7.25%, down 25 basis points in the past one month, as inflation eased in India and the United States, slowing the pace of interest rate hikes.
The rates strategist pegs India’s terminal repo rate at 6.50%, with a rate hike on Wednesday as well as at the end of the policy meeting in February.
Besides, foreign inflows into Indian bonds may not pick up that quickly, Arora said, calling November a “one-off”.
He added that compared to many other emerging markets, Indian bond yields are not attractive.
foreign investors CCIL data showed net government bond purchases of 37.1 billion rupees ($450.98 million) in November, after being sellers in September and October.
UBS’ Arora said, “Flows were also seen in some peer bond markets such as Indonesia, and so were regional equity markets. November was generally a very strong risk-on month.”
“We don’t think this is sustainable in emerging markets at a time when we, the global economy, are entering recession,” he added.
Arora expects further tightening of global financial conditions in the next few months, which will put pressure on emerging market currencies, including the rupee.
The Indian rupee was trading at 82.20 against the dollar after recovering from a record low of 83.29 in October.
Arora said he remarked that the current valuation of the rupee is very expensive, while the trade deficit is still weak.
“Hence the 84 does not appear to be an aggressive call, even though it is out of sync with current price action,” he added.
Even though the global slowdown may provide some relief to bond yields, the pressure on the rupee is unlikely to ease immediately.
(with inputs from Reuters)
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