Bond yields slump ahead of release of inflation data

World-wide inflation is down with oil not able to move up despite cuts in production by OPEC+. The US is pumping enough oil to keep the cuts by them in bay while Chinese economy, a laggard, has kept the demand down.

Bond yields fell marginally ahead of the release of domestic and US retail inflation data for January. However, gains were restricted following a surge in the US Treasury yields after higher-than-expected their inflation data dampened the expectation of early rate cut by the Federal Reserve.

Yield on the 10-year benchmark paper (7.18 per cent GS 2033) fell by 1 bps to close at 7.10 per cent from the previous week’s close of 7.11 per cent, states a Icra report.

Data from the Reserve Bank of India (RBI) showed that India's foreign exchange reserves fell to $617.23 billion for the week ended February 9, as against $622.47 billion a week earlier.

Investors, including fund managers, insurers and bankers have increased their positions in longer duration bonds given the lower fiscal deficit. Lower interest costs will indirectly strategically provide purchasing power in people’s hands.

The Indian bonds could give yields of 8-12 per cent, which is better than fixed deposits. The yields could drop to 6.75 per cent towards the later part of this year as flows come in, FED cut rates, system liquidity eases and RBI could also start easing.

Though a rate cut was surely not expected out of the 6-8 February meet of RBI, the market was expecting that the central bank would change its stance to neutral from withdrawal of accommodation. The RBI did not make any efforts to loosen the tight liquidity of the market. The liquidity deficit is Rs. 1.50 lakh crore and keeps fluctuating between Rs. 1.50 lakh crore to Rs. 2.50 lakh crore. This keeps borrowing costs elevated and short term rates volatile.

The FED is still in a ‘hold’ mode and most central banks seem to be waiting for FED to act first before they can act.

India’s CPI inflation is down to 5.1 per cent a figure that RBI would have surely known at the time of the meeting on February 8. World-wide inflation is down with oil not able to move up despite cuts in production by OPEC+. The US is pumping enough oil to keep the cuts by them in bay while Chinese economy, a laggard, has kept the demand down.

The Indian budget, despite being the last budget of the current establishment, did not contain any populist policies. Instead, the fiscal deficit was reduced from a revised 5.8 per cent of GDP in 2023-24 to 5.1 per cent in 2024-25.

Talking to Bizz Buzz, Anil Kumar Bhansali, Head of Treasury and Executive Director, Finrex Treasury Advisors, says, “Given the government’s consistent track-record, it is expected that they will achieve the fiscal goal they have set, which is reducing the fiscal deficit to four per cent of the GDP by 2026. Though yields have not fallen much since the announcement of the budget, they are on the downside. The tight liquidity conditions have kept the yields up while inflow on account of front running of inclusion in the JP Morgan Bond Index has kept yields to the downside.”

The lower fiscal deficit numbers have come to aid the high yields. The gross borrowing was also lower at Rs. 14.13 lakh crore in 2024-25 as against economists’ estimates of Rs. 15.6 lakh crore. The lower fiscal deficit and gross borrowing will be major positive for the country, he said.

The RBI has resolved to manage the inflows expected to come into the country following the inclusion in the JP Morgan Bond Index. It will also remain alert on hot money that could cause volatility in the bond and currency market. The incremental inflow could be high at $ 23 billion from June 28. If FTSE and Bloomberg also include Indian bonds into their indices, then another $ 20 billion could be seen. Front running, has already bought in $ 5.37 billion into the government bonds in the last three months.

“The rupee could rise to Rs. 82.50 as inflows increase subject to RBI allowing some appreciation into the currency by letting go the rupee though it has resolved to manage the influx of dollars due to the inclusion into the JP Morgan Bond fund,” he said.