Expect 10yr benchmark bond yield to trade in a range of 6.90% to 7.25% over the course of the next one month

Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund.

Our View:

We expect yields to keep trending higher gradually and expect monetary tightening from RBI to start from the June MPC policy. Money market yields of up to 1yr are looking attractive relatively from a risk-reward perspective as yields near 8%. Investors with short term investment horizon can look to allocate in this segment. Bond yields are already factoring in rise in policy rates, and we expect policy rates to rise by 50 -75 bps by the end of CY2026. We expect 10yr benchmark bond yield to trade in a range of 6.90% to 7.25% over the course of the next one month.

Indian Markets:

Bond yields rose during the week as volatility continued with conflicting reports emerging on the progress of the peace deal in the Middle East. G-sec yields rose across the yield curve by 3-6 bps. Yields rose more in the Money Market curve as liquidity reduced and some market participants factored in aggressive rate hikes from RBI as INR touched a record low of 96.83/USD. Fuel prices were raised further, as expected with the total fuel price hike coming to Rs. 7 (approx.). This hike has been done in four phases so far and we expect further increases in prices as the under recoveries of the OMCs continue.

RBI announced a dividend of Rs. 2.87 lac cr, an all-time high, amounting to 0.70% of GDP and in line with markets estimates. Last year's dividend was also 0.70% of GDP at Rs. 2.70 lac cr. The Central government had estimated a total dividend of Rs. 3.16 lac cr all put together from RBI and Banks PFI's in the Union Budget for FY27. Thus, RBI's dividend amounts to 90.70% of the total dividend estimated. The contingency risk buffer was lowered to 6.50% of the RBI's balance sheet from 7.50% of last year.

In a week of light macro-economic data, bond markets moved in line with INR and Brent movement with erratic Middle East news flows. RBI announced a USD 5bn Buy/Sell swap amidst mounting pressure to control the slide in INR. There were continuous news reports of RBI/ Government consideration measures to augment USD inflows but no steps were announced, though we believe that such measures are very well in the works and can be expected very soon as BoP deficit is likely to be wider this year with analysts expecting the deficit to be in the vicinity of USD 50bn and we need to augment dollar inflows, especially in light of the continuous FPI outflows from equity markets.

FPI outflows have topped USD 23bn so far on from equities while in debt there have been inflows to the tune of USD 400mn on a YTD basis. This month, debt saw inflows of USD190 mn while equities saw outflow of USD 3.19 bn.

There were contrasting reports of RBI taking monetary action to support INR with one report indicating aggressive action while the other report mentioned non-monetary measures as the first step/consideration. Many people are comparing the current situation to the 2013 episode of INR weakness, but we tend to differ and see no comparison at all between 2013 and the current scenario. In 2013, CPI inflation was running in double digits and there were no external supply shocks like the one we are witnessing right now. The current Inflation is below 4% and even as it's expected to increase going forwards, its difficult to envisage a scenario of double digit CPI inflation right now.

Our sense is that RBI will use combination of monetary policy action and measures to augment USD supply as a counter to bridge the BOP deficit. The OIS curve is factoring in 125 bps of rate hikes over the next 1 year and we foresee 50-75 bps of rate hikes by December 2026. The Money Market curve has been under substantial pressure as RBI intervention has tightened liquidity and expectations of rate hikes have increased. The 3-month yield traded above 5.50% for the first time in many months and 3-month maturity Bank CDs are trading in the vicinity of 7.50%, touching the highs seen in March.

International Markets:

Worldwide, bond yields continued to stay elevated as inflation and fiscal concerns continued to dominate the narrative. Indonesia hiked rates by more than expected to 50bps to calm the currency markets.

Source: RBI

Source : Equity Bulls

Keywords

10Years BenchmarkBondYield FixedIncome PGIMIndiaMutualFund