In a recent development, the Bharatiya government’s fiscally prudent budget has sparked optimism among bond traders, as it may lead the Reserve Bank of India (RBI) to adopt a dovish monetary policy stance. The budget revealed a borrowing plan that was below market expectations, causing yields to slide to a seven-month low. This move has set the stage for RBI Governor Shaktikanta Das to potentially shift from a withdrawal of accommodation to a more neutral stance in the upcoming February 8 meeting.
Analysts believe that the fiscal compression resulting from the budget provides significant comfort to the RBI in achieving its inflation target. Suyash Choudhary, Head of Fixed Income at Bandhan Mutual Fund, emphasized that the central bank now has little reason to delay easing its liquidity stance, especially with inflation consistently below its latest forecast.
Kotak Mahindra Bank Ltd. anticipates that India’s 10-year bond yield could fall to as low as 6.70% in the fiscal year starting April. Similarly, Barclays sees the yield dropping to 6.80%, a decline from Friday’s close of 7.06%. The rally in Indian bonds over the past three months, driven by overseas inflows ahead of global index inclusion starting June, has contributed to a 30 basis point decrease in 10-year yields since the end of October. Notably, last week saw a 12 basis point drop, the most significant decline since November 2022, following the announcement of the prudent budget.
Traders are particularly optimistic about the potential easing as lower government borrowings are expected to make it easier for the market to absorb supply. This positive development aligns well with the anticipated inclusion of India’s debt in JPMorgan Chase & Co’s emerging market bond index, set to commence in the coming year. The inclusion is predicted to attract substantial inflows into the Indian bond market, further supporting the ongoing rally.
In summary, the fiscal prudence demonstrated in India’s budget has created a favorable environment for a dovish monetary policy shift by the RBI, potentially extending the recent bond market rally. Analysts are closely watching the central bank’s upcoming meeting for signals on its stance, with expectations of continued positive momentum in the Indian bond market.
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