Anticipated Drop in India’s 10-Year Bond Yield to 6.50-6.75% in H2 Driven by FPI Demand and Policy Rate Cuts

Projections suggest a potential easing trend in India’s 10-year bond yield, ranging between 6.50-6.75% by the second half of the fiscal year. This anticipation stems from the expected initiation of policy rate cuts by major central banks worldwide, including the Reserve Bank of India (RBI). Combined with a lower-than-anticipated supply, Indian bond yields are poised to alleviate from their current levels.

The United States Federal Reserve and other global central banks may initiate policy rate cuts within this fiscal year. The Monetary Policy Committee’s (MPC) decision to maintain rates during the April meeting aligns with market expectations.

Throughout March, India’s 10-year benchmark yield has exhibited a confined fluctuation. Although the heavy load of state borrowings initially weighed on sentiment, the manageable supply from the central government has counteracted this effect.

Looking ahead, it’s forecasted that the 10-year bond will consolidate within the 6.50-6.75% range for the year 2024-25. This projection is supported by the anticipated demand from foreign investors and the impending policy rate cuts.

On Monday, Indian bond yields experienced an ascent, with the 10-year benchmark yield reaching its highest level in over two months. This movement mirrors the trend observed in U.S. bond markets, driven by robust economic data that has deferred expectations regarding the Federal Reserve’s initial rate cut.

The closing 10-year yield stood at 7.1501%, marking an increase from Friday’s close of 7.1232%. Investors are now awaiting March inflation data, both domestically and in the U.S., which are expected later in the week to provide further market direction.

Projections for India’s headline retail inflation in March estimate a year-on-year rate of 4.7%, the lowest since May 2023. This easing in core inflation, as noted by Barclays, aligns with expectations of a forthcoming policy easing by the RBI, as inflation trends towards the target rate in FY25.

While U.S. yields surged following positive non-farm payroll data for March, uncertainties persist regarding the timing of rate cuts. The likelihood of a June action by the Federal Reserve has diminished, along with expectations for aggregate cuts throughout 2024, according to the CME FedWatch tool.

Should the Federal Reserve delay its rate cut cycle due to adverse U.S. inflation readings, a ripple effect may delay the RBI’s rate cut cycle, as suggested by economist Gaura Sengupta from IDFC First Bank.

Last week, the RBI opted to maintain interest rates for the seventh consecutive policy meeting, citing expectations of robust economic growth coupled with inflation remaining above the 4% target.

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