Bond traders in India are riding high on optimism as they anticipate a fiscally prudent budget to pave the way for a dovish monetary policy shift by the Reserve Bank of India (RBI). The market witnessed yields sliding to a seven-month low last week following New Delhi’s unveiling of a borrowing plan that fell below market estimates, setting the stage for the RBI to possibly signal a shift from accommodation withdrawal to a neutral stance.
The fiscal prudence exhibited in the budget has bolstered the case for the RBI to consider a more accommodative approach. Traders are hopeful that the central bank may ease its liquidity stance in its upcoming meeting on February 8 or the subsequent one. Suyash Choudhary, Head of Fixed Income at Bandhan Mutual Fund, notes that the fiscal compression provides comfort to the RBI concerning the attainment of its inflation target.
Kotak Mahindra Bank Ltd. predicts that India’s 10-year bond yield could fall to as low as 6.70% in the fiscal year starting April, while Barclays Plc. sees it dropping to 6.80% from Friday’s close of 7.06%. The rally in Indian bonds over the past three months, fueled by overseas inflows ahead of global index inclusion starting June, has seen 10-year yields decrease by about 30 basis points since the end of October.
“We assign a 70% probability of a change in the monetary policy stance” in this week’s policy, said Puneet Pal, Head of Fixed Income at PGIM Mutual Fund.
While some argue that higher headline inflation may prompt caution from the RBI, traders remain optimistic, citing the easing of core inflation and the lower government borrowings making it easier for the market to absorb supply. This positive outlook comes as India plans to borrow 14.13 trillion rupees ($170 billion) in the coming fiscal year, significantly lower than the 15.2 trillion rupees estimated in a Bloomberg survey. The budget deficit for the next fiscal year is targeted at 5.1% of the gross domestic product, compared with 5.8% for the current period.
Sandeep Yadav, Head of Fixed Income at DSP Mutual Fund, expressed confidence in the bond market’s prospects, stating, “We have been bullish on bonds, and the budget reinforces our view. Increasing demand and decreasing supply make 2024 a good year for bonds.”
As the RBI’s monetary policy decision approaches, market participants keenly await signals that could further extend the impressive rally in India’s bond market.