Tag: Bond Yield

A bond rally has taken the 10-year yield to near four-month lows: Key reasons and what it means

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Indian bonds have witnessed buying interest, thanks to several factors that have aligned favourably. The yield on the 10-year g-sec plunged to 7.146 on January 16, taking the benchmark bond to its lowest since September 21, 2023.

The fall in bond yields has many implications, not least that it could nudge the Reserve Bank of India’s (RBI) to cut interest rates sooner.

A fall in bond yields is a positive as yields move inversely to prices. Basically, if investors are buying a lot of bonds, the prices of bonds move up and the competition to buy leads investors to accept bonds at lower yields.

Key reasons for the bond rally

Below are some of the key reasons for the fall in yields.

1. The immediate trigger was the release of the December consumer price index (CPI) data, which came in at 5.69%, much lower than 6% plus number that economists were expecting. The latest print meant that the rise in consumer prices averaged 5.4%, well below the Reserve Bank’s 5.6% forecast. The RBI has a 2-6% comfort range for inflation.

2. The fall in Indian prices is not the only positive. Disinflation is a trend that is seen in the US as well, where producer prices fell 0.1% in December, according to data released two days ago, compared to an expectation of a 0.1% rise.

3. Foreign portfolio investors have been buying Indian bonds in large quantities, with data showing purchases worth $108 million in a single day on January 12.

4. Another big positive was the announcement that states were going to borrow ₹19,000 crore from the market, lower than the expected nearly ₹22,000 crore. Lower borrowing indicates that states’ fiscal position is more comfortable than thought, leading investors to be more bullish on the country’s bonds.

Also Read | Worst is behind: Morgan Stanley’s Chetan Ahya says US bond yield has peaked, sees 4.2% on 10-year soon

What this means for markets, economy and consumer

The fall in inflation could prompt the Reserve Bank’s monetary policy committee (MPC) to cut interest rates sooner than expected.

The MPC has upped the benchmark repo rate six times since April 2022, from a low of 4% to 6.5% currently. It has also named its stance “as withdrawal of accommodation”, referring to the low rates that the economy enjoyed before the hike. Economists at Citi India and ICICI Securities Primary Dealership say this stance may now change to “neutral” as early as in February.

The RBI has held on the current repo rate of 6.5% for nearly a year, and a change to a neutral stance will precede any rate cut that can come through in future. A rate cut in the repo rate will have a cascading effect on bank loan rates, including consumer loans and will help cut EMIs.

The fall in bond prices also mean lower borrowing costs for the government, as well as for corporates as other bonds in India are priced relative to the benchmark government bond.

Lower borrowing costs lead to better earnings for companies, which could then benefit the stock market.

For more, watch the accompanying video

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Borrowing costs on foreign loans to get costlier as global bond yields rise

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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With the yield on US-10-year bond surpassing the psychological 5% mark, domestic companies that opt for foreign currency loans are likely to see higher debt servicing costs going forward.

The strengthening dollar and surging crude oil prices add fuel to the fire. While the rupee has depreciated 1.6% against the US dollar over the past three months, oil prices have surged 13.2% during the same period.

While foreign-currency-denominated borrowings normally tend to be cheaper compared to local currency loans, the narrowing spread between the US and Indian bond yields will bring down cost advantage for many of them.

For instance, the finance cost as a percentage of total debt for BSE500 companies stood at 7.7% at the end of FY23, against 6.6% for companies with some overseas borrowings on their books.

The gross borrowings for BSE500 companies (excluding banks and financials) increased 11% year-on-year to ₹33.04 lakh crore in FY23, data sourced from Ace Equity database shows. Of them, nearly 70 companies had foreign loans on their books, totalling ₹4.4 lakh crore. Additionally, the foreign loans of these 70 companies account for 22.2% of their combined borrowings, which stood at ₹19.6 lakh crore as of March 2023.

The companies with the highest foreign loans in absolute terms include IOCL, ONGC, TATA Motors, NTPC, and Adani Ports & SEZ, among others. While the foreign currency loans account for more than 80% of Jubilant Pharmova and Oil India’s total borrowings in FY23, other companies like Adani Ports and SEZ, Glenmark Pharmaceuticals, and UPL also have borrowed more than 60% from abroad as of March 2023.

India’s benchmark bond yield has hovered around 7.3% for the past few days whereas the US yield crossed 5% for the first time since 2007. That has resulted in shrinking the spread between the two notes to 237 basis points (bps), levels last seen in May 2006.

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Why is Wall Street nervous this Friday the 13th?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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“It would be a very welcoming, positive surprise if the Fed were to come in and say they are going to pause for now. But, looking at the consumer price index (CPI) print numbers, we should brace for another rate hike,” Dean Kim, Head-Global Research Product at William O’Neil + Co., said in an interview with CNBC-TV18.

The next US Federal Reserve monetary policy meeting is scheduled from October 31 to November 1.

Key takeaways from US CPI Data

US consumer prices in September rose slightly faster than expected due to higher gas prices and rental costs. This has raised the possibility of the Federal Reserve initiating another round of interest rate increases.

CPI for September rose 3.7%, per data released by the Bureau of Labor Statistics (BLS) on October 12.

However, core inflation, which excludes the volatile components of energy and food prices, remained stable with a 0.3% month-on-month (MoM) increase, aligning with analysts’ forecasts. On a year-on-year (YoY) basis, core inflation saw a slight decline from 4.3% to 4.1%.

The September jobs report released last week delivered a surprise, revealing the addition of 336,000 jobs, nearly double the anticipated figure. The unemployment rate held steady at 3.8%. The robust performance had already prompted traders to adjust their expectations, with increased bets on an interest rate hike by the year’s end.

Kim said it would come as a shock if the US Federal Reserve were to unexpectedly declare a halt in their ongoing series of interest rate increases. Such a move has the potential to create a profound ripple effect in the worldwide financial markets, especially considering that numerous individuals were anticipating further rate hikes to address inflation concerns.

US treasury yields also jumped as investors assessed recent economic data indicating persistent and elevated inflation. The yield on the 10-year Treasury bonds saw an uptick of approximately 11 basis points, reaching 4.707%, rebounding from its earlier session lows.

“The US Treasury bond auction that went on this week, the demand was weaker than expected prompting the yields to elevate,” Kim added.

Contributing to the anxiety is the anticipation of the upcoming earnings reports from major financial institutions such as JPMorgan Chase, Citigroup, and Wells Fargo.

The US markets slipped on Thursday, following a two-day surge and in response to the latest inflation data.

The Dow Jones, S&P 500, and Nasdaq lost half a percent each. Dow Futures were down marginally at 33,775 early Friday.

(with input from agencies)

For more details, watch the accompanying video

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Rising US yields, geopolitical shifts and RBI’s hawkish stance challenge Indian bonds, says Morgan Stanley

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Chetan Ahya, Chief Asia Economist at Morgan Stanley expects the Reserve Bank of India to begin cutting rates from the second quarter of calendar year 2024.

“We are expecting just about a 50-bps cut. So, it will be a shallow rate-cut cycle,” he told CNBC-TV18.

Ahya also shared his thoughts on the bond market and geopolitical changes in the Middle East.

Bonds and currencies in India and across Asia have encountered unforeseen challenges. The primary concern is the significant increase in US yields, which has surged by approximately 130 basis points since May.

Even though there has been a slight reduction in US yields, recent geopolitical changes in the Middle East have raised fresh concerns about oil prices, which, in turn, affect Asian bonds.

Below is the verbatim transcript of the interview:

Q: We have a plateful over here in terms of issues. But first, let me begin with the US bond yields. This time Asia, according to your report is not going to be impacted much.

A: Yes, that is right. I think the bulk of the rise in real rates that we have seen in the US has been driven by the fact that term premiums have gone up, and market expectations on the Fed policy rate hikes have not been much. So that is one important difference in terms of the rise in the US yields this time.

The second is that Asia’s inflation outlook has been still quite comfortable. We are expecting that Asia is going to see 80% of the region’s central banks having inflation within their comfort zone or closer to target by the end of this month, when you get the data for the September quarter, everybody’s inflation will have looked like it’s within central bank’s comfort zone. So, Asia does not have that big an inflation problem and so usually the way we think about this dynamic when US rates are going up is the fact that whether Asian central banks have their policy setting in a way that the macro stability indicators like inflation and current account balance are in a good position.

And when you try to answer that question, the answer is yes. Most of the countries in the region except for the Philippines have inflation and current account balances in a shape that central banks do not have to take up interest rate hikes.

And so, this is the main thought process behind which we are saying that Asia’s macro stability indicators are in good shape. We do not think central banks have to respond to this rise in US interest rates with higher policy rates.

Q: They may not do it with higher policy rates, but will they have to postpone rate cuts? I mean, can you really cut, say Indian repo rates, if the US yields are still climbing? Never mind even if the Fed has stopped; if the yields are climbing, will that be a bit of a challenge for the currency, and therefore will RBI desist from rate cuts?

A: That is right. We do not think that the central banks in the region will be able to cut interest rates when the US rates are rising up or the dollar is strengthening too much with Fed rate hike expectations going up. That is the reason why we have most of the region’s central banks, which are about to be able to cut rates will be delayed till Q2 of next year. So that is the quarter ending June 2024 because we also expect that by that time Fed would have indirectly or directly indicated that they are not taking up more rate hikes and that they are actually about to cut interest rates.

So, we will need confirmation from the Fed that the Fed is done with this tightening cycle and it’s about to embark on an easing cycle for Asian central banks to also be able to cut rates.

But the reason why we are thinking about some modest rate cuts in the region is that you will have a dynamic where inflation would have decelerated quite a lot and real rates would have been rising. That would be away from the policy stance that various central banks would have is that real rates would have implied that you are tightening monetary policy when it may not have been warranted.

Q: I will come back to Asia and India, but what is Morgan Stanley’s house view on US yields itself? This move in the 10-year from 3.5% in May-June, all the way to 4.85% was quite unexpected. And there has been a kneejerk 20 basis fall. So is a significant retracement expected, or is the medium-term range likely to be towards 5 because there is fiscal oversupply?

A: We are expecting rates to moderate from here and our thought process is that if you break up the 10-year bond yield trends into policy rate expectations and term premium. Both those aspects, we think, will support 10-year bond yield to go lower.

But the most important driver to our lower rates forecast is that the Fed will be cutting rates in the next calendar year by about 75 to 100 basis points. And that is what will create that environment for US 10-year rates to go down.

So, we have been of that view, and you are right, the recent rise was a surprise, and it was not in our forecast. But our US rates team is still maintaining that the trajectory of the 10-year bond yield is downward, closer to four-handle rather than staying at 5%.

Q: Four-handle, that is still a long way if we have to get closer to 4%, but coming back to India, how do you assess the Reserve Bank’s response to the monetary policy? Why would they announce such an important step like an OMO, an open market sale that has pushed up yields considerably? Should that be read as a defense against US yields?

A: Yes, I would think so. I think the way we are seeing various Asian central banks – some of them are explicit like BoK, which mentions the Fed policy path and what is happening to the US rates. And RBI has been sort of more focused on the domestic inflation.

But it’s very clear that somewhere in the back of the mind, the developments in the US rates and the Fed policy outlook are weighing on the RBI’s mind as well, and in an environment where oil prices had been rising, at least at the time when monetary policy decision got taken. They would have to consider the fact that you have a combination of higher US rates, higher dollar, and higher oil prices weighing on the inflation outlook.

So, they didn’t want to sound in any way indicative that they are done, and they are going to cut rates because that will ease financial conditions and that will risk that the currency will depreciate, and I think that’s really the main driver behind RBI’s increased hawkishness.

We do not think that the underlying inflation dynamic in India is right now warranting that shift and hawkishness but it’s the outlook of that inflation affected by this, potential dollar rises, and higher oil is that has weighed on RBI’s mind.

Q: I am not trying to ask you your view on the new geopolitical problem in the Middle East, the Israel-Hamas war, but will Asia have to struggle with higher crude prices? Is that one of your base cases?

A: Right now, our oil analyst is not forecasting oil prices to rise meaningfully. Our forecast is that oil prices will average around $95/bbl in the fourth quarter of this year, and then head towards $85/bbl next year.

So, we are not expecting all prices to go up in our base case. But if it does go up because of these geopolitical tensions, it will definitely complicate the monetary policy management in the region.

And so, in that scenario, while I mentioned our base case, we are not expecting rate highs; in fact, we are expecting rate cuts to be happening, though in a delayed manner. In this risk scenario, where oil prices shoot up, we will see that there is a possibility that some of the central banks may have to pick up a rate hike.

Q: What is your RBI rate cut date?

A: We are forecasting a rate cut in the second quarter of 2024, and we are expecting just about a 50-bps cut. So, it will be a shallow rate-cut cycle.

Q: When you say second quarter you mean second calendar quarter, right? April-May-June?

A: That is right, the April to June quarter.

Q: On growth, the US yields are high, we hear about problems in the commercial real estate and with the 10-year yields, with the term premium also rising is there a chance that US growth and therefore global growth gets impacted. What would your take be for India if the global impulses are going to be weak?

A: First, on the US, we are expecting growth to slow from this quarter itself. There are a few things that are going on in the US. One, real rates are rising, and so monetary policy is gradually tightening. Second, we do not think we will get as much fiscal support and so fiscal impulse is not going to be positive like it was in the last 12 months. Third, there is going to be the student loans, repayment that will burden the consumers. And finally, the excess saving stock for the bottom 20% has exhausted. So, we are expecting consumption slowdown and overall growth slowdown in the US. In the context, this recent real rate rise has only added to that downward pressure because the US economy is funded to a large extent with long tenure borrowing. And therefore, we think that case that we have in our base case that there will be a slowdown is only getting more confirmed. Now, as far as India is concerned, this may not be a bad thing. So as long as the US is slowing, but not going into a deeper recession, it will be good for the region and India in the sense that it takes off this pressure of dollar rise and US higher rates but brings it down into a situation where you don’t have a big downside to exports growth. So soft landing in the US even if it may be a deeper slowdown, it’s fine as long as you do not get a deeper recession.

Q: So, Indian growth, what is your number now?

A: We are at 6.4% for the current financial year. And the next financial year we are at around the same number – 6.5% on an average.

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Yardeni says surging bond yields threaten real estate, urges Fed caution

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Ed Yardeni, President of Yardeni Research, pointed out the substantial impact of soaring bond yields, likening it to a form of tightening monetary policy.

In an interview with CNBC-TV18, Yardeni shared insights into the challenges posed by a 5% 10-year bond yield, particularly for the commercial real estate sector.

The benchmark 10-year Treasury yield in the US rose 5 basis points on October 9 to 4.795%.

Last week, the yield on the 30-year US Treasury bond crossed 5% for the first time since 2007.  “Cracks” are appearing as emerging market sovereign bonds come under pressure on the heels of rising US treasury yields, the world’s risk-free benchmark that draws money from other investments as interest rates rise, a Reuters report said quoting Goldman Sachs economists.

He contends that the Fed should acknowledge that the escalating bond yields are effectively performing the tightening role, alleviating the need for further immediate action.

“The Fed needs to recognise that the incredible increase in the bond yield is already a form of tightening. The bond markets doing a lot of the work for the Fed from here on; I mean, 10-year bond yield is close to 5% is quite a disaster for commercial real estate. So, we have had this rolling recession that is now rolling through commercial real estate, and I do not think the Fed needs to do anymore,” said Yardeni.

While talking about monetary policy, he began by cautioning that the Federal Reserve should avoid pushing its monetary policy too far.

“The Fed has to recognise that the economy is still very resilient, they don’t want to push this thing too far. I mean, if wage inflation is coming down, and if we get a decent consumer price index (CPI), the expectation is 0.3% – couldn’t be lower if the rent inflation finally comes down. I think inflation is coming down without a recession, if that is the case then I don’t think the Fed should not push this thing too far,” he said.

For more details, watch the accompanying video

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Spread between bond yield and earnings yield widen as stocks get more costly

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The spread between bond yield and earnings yield has widened to the highest level since February, suggesting that the bond is becoming more attractive to investors, which normally accompanies with fewer risks.

A sharp rally in domestic stocks has taken the valuation of Nifty50 to 18.7 times of its one-year forward earnings, which is nearly one standard deviation above its long-term average. The benchmark index has surged as much as 15 percent from its March lows whereas the yields on the 10-year benchmark bond surged as much as 18 basis points over the last two months.

While India’s equity valuations versus bonds are still shy of the warning level, our proprietary India Bull-Bear Investor Sentiment Index is now at a 20-month-high 96% bullish reading, observed CLSA in an investor note. The foreign brokerage which has a cautious view on Indian stocks said, “The difference between India’s 10-year yield and 12-month forward consensus earnings yield has risen to 1.7ppts — still below the danger zone of 2.0ppts.”

The brokerage further added that the equity valuations versus debt are much more extended in developed markets like the US, France and the UK.

The measure which shows relative attractiveness of bond over equities has hit 287 basis points (bps) on Thursday, marking the widest gap Since February 1, data sourced from Bloomberg showed.

On the other hand, the yields on 10-year benchmark bond rose four basis points on Thursday to hit a two-and-a-half month high, tracking a sharp spike in US treasury yields after minutes of latest FOMC meeting hinted another rate hike this month. The rise in bond yield along with a fall in earnings yield resulted a widening gap between the two.

Analysts at Goldman Sachs expect moderate returns from Indian equities as it “over-delivered” in Q2 relative to the changes in the macroeconomic environment, suggesting consolidation of gains in the near-term. The foreign brokerage which expects a better performance in Q4 said, “History suggests modest forward returns from current starting level of valuations.”

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View: There’s more to the rise in bond yields than the hawkish MPC minutes

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Indian bond yields continue to inch higher but more because of the recent spree of rate hikes by the central banks of UK, Norway, Switzerland and Turkey. US Fed Chair Jerome Powell’s testimony to Congress backing more rate hikes albeit at a careful pace has added to the global and local mood of bearishness on bonds. Dealers noted the hawkishness in the minutes of the monetary policy committee but said that they wouldn’t trade on it. They would rather wait for data and rate action.

Minutes of MPC – Takeaways

The minutes of the policy were probably a tad more hawkish than the press conference post the June 8 policy. In that presser, the governor asserted the MPC’s job on inflation is unfinished until the inflation rate gets aligned to the target of 4 percent.

In the minutes, he pretty much reiterated these thoughts that “the fight against inflation is not yet over”; that there is a “need to assess evolving inflation-growth outlook and stand ready to act” and that given the uncertainties, it is tough to give definitive forward guidance about future action in a rate tightening cycle (emphasis ours). “We have a way to go to align headline inflation with 4.0 per cent target on a durable basis,” he concluded.

RBI-MPC member Michael Patra is even more hawkish when he writes that “holding the rate unchanged should not be interpreted as the interest rate cycle having peaked” and the “pause is for careful evaluation on the extent of additional policy tightening, if needed”. Pause is till the next meeting of the MPC, and not a prolonged pause, he warns. RBI member Ranjan is more satisfied with growth and inflation but worries that any softening of stance can impede the pass through of rate hikes announced so far.

Also read: What RBI needs to go from a pause to rate cut, RBI MPC members weigh in

What is the difference in the latest minutes is that external member JR Varma, who had earlier voted against repo rate hikes above 6 percent, admits “it would be premature to declare victory at this point of time based on the inflation prints of a couple of months”. There seems near broad agreement to use the clement macro situation to push towards the inflation target of 4 percent. Only member Ashima Goyal worries that MPC ought not to let real repo rate rise too high. “This is what happened in 2015 as international oil prices fell, damaging the economic cycle,” she writes. She clearly does not want “the nominal repo to be kept higher for longer”.

Net net the market has judged the minutes to be a tad more hawkish because of a more general commitment to bringing inflation to 4 percent. And Patra goes on to emphasise that the pause should not be seen as an end to the hiking cycle. But dealers iterated that minutes are a lot of noise and the rise in bond yields in morning trades was more due to the global rate hikes and yield spurts.

Global wave of rate hikes

In the past 24 hours, three major central banks – BOE, Swiss National Bank and Norges Bank – have raised rates, and the BOE by more than expected. What’s more a long time outlier, Turkey, raised rates by 650 bps to 15 percent, acknowledging the conventional goal of fighting inflation through higher rates.

While a large part of Indian markets don’t see the need for RBI to follow Western central banks, there is a slight concern on interest rate differentials between dollar and rupee rates. The swap market is pencilling a minor chance of India’s first rate cut in April, but bigger bets are on rate cuts in June and October of 2024. No hikes are pencilled in by the Indian bond markets.

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Indian govt bond market sees yield curve invert briefly on Fed’s hawkish comments on rate hike

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Indian debt market saw a slight inversion in the yield curve for the first time in nearly eight years. The one-year bond traded about 0.3 basis points above the yield on the 10-year bond, as a consequence of hawkish comments from Fed chair Jerome Powell and on fears of liquidity tightening expected in April.

It all began with yields rising since Tuesday morning all over the world and in India after Jerome Powell said in his testimony to Congress that given the strong economic data, rates may have to remain higher for longer, and even be raised at a faster clip.

The US 10-yr bond yield rose to 4% on Monday after the testimony. Reacting to this news, the Indian 10-year government bond yield rose to 7.472% today. At the treasury bill auction conducted by the RBI today, the yield on the 364-day T-bill came in at 7.48%. Thereafter, the traded one-year bond, which closely follows the auction cut-off, also rose to 7.475% thus trading slightly and briefly above the 10-year bond.

In bond market parlance, this is call yield-inversion, when near term bonds trade at a higher yield than longer term bonds. Yield inversion usually signals an upcoming recession, since it indicates that while markets expect rates to rise in the short run, they expect yields to fall in the longer term as the higher rates will cause an economic slowdown, even recession.

Dealers however rubbished any possibility of recession in India. The jump in the near term yields has been attributed more to an expected liquidity tightness in April as the RBI TLTRO (targeted long term repo operations) gets wound up.

Under the TLTRO announced in April 2020, banks were allowed to borrow 1-3 year money at 4%. These monies have to be paid back in April 2023 and this could create a slight liquidity tightness, dealers say. But more importantly, near-term yields are also rising because the RBI, like other emerging market central banks, may have to raise rates some more to protect the rupee, if the Federal reserve indicates three or more additional hikes.

If US near term yields rise to 5.5% (the US 1 year yld is already at 5.2%), dealers guess exporters may not want to sell their dollars as the yield in dollars is almost as attractive as the rupee yield. Also foreign fund flows into EMs like India may dry up given the high risk free return from US treasuries. This could result in pressure on the rupee, to fend off which, the RBI may be forced to raise rates. Such speculation led to the slight yield inversion today, dealers said.

Also read: India’s corporate debt market fund will help boost liquidity and confidence in the bond market

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Yield Curve Alarm Rings Different in $1 Trillion India Market

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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It’s India’s turn for a popular global bond-market recession signal to flash red, but investors should avoid jumping to quick conclusions about the outlook for the domestic economy, according to Bloomberg.

Local supply and demand characteristics of the $1 trillion Indian government bond market have helped send a closely-watched section of its yield curve barreling toward an inversion, just as much as any shift in sentiment toward the economy. The spread between 10- and 2-year bonds is close to dipping below zero for the first time since 2017.

A yield-curve inversion is often seen as a harbinger of a recession, as it can reflect an investor shift toward longer-term bonds due to pessimism over economic growth. A gauge measuring the worldwide yield curve inverted for the first time in at least two decades last November on global recession fears, while the US curve is at its most extreme in over 40 years.

But in India’s case stronger-than-expected demand for longer-tenor debt has also come from insurers and pension funds investing due to the increased financial sophistication of a rapidly growing economy. Also, it’s been fueled by a derivative trade between banks and insurance companies.

“What is unique to India is it’s a market that is still developing,” said Prasanna Ananthasubramanian, chief economist at ICICI Securities Primary Dealership Ltd. “It has a segmented yield curve along with demand-supply imbalance.”

Short-Dated Pressure

At the shorter end of India’s curve, the government increased March’s borrowing target for T-bills maturing in less than a year by 500 billion rupees ($6.1 billion). Bond sales for the fiscal year ending in March are already done, but T-bill auctions will continue through the month at higher amounts than usual, adding upward pressure to short-term yields.

A gauge of the rate on short-term debt derived from T-bill auctions has surged to the highest in over four years.

Adding to the supply pressures, liquidity conditions are as tight as they have been since before the pandemic due to the central bank’s rate increases. And expectations have grown that policymakers will hike rates at least once or twice more following a more hawkish tilt globally and a shock January inflation print, according to Bloomberg.

“The flattening out of the yield curve toward the top of the rate cycle is to be expected, especially when it is accompanied with a drying up of system liquidity after a very long time,” said Suyash Choudhary, head of fixed income at IDFC Asset Management. “Unlike in developed markets, one shouldn’t draw too many macro implications from this.”

Economic Challenges

Of course, India’s economy does face challenges that are also reflected in bond-market pricing. Data this month showed growth came in below expectations in the quarter through December as a gloomy global outlook and rising borrowing costs hurt manufacturing and consumption.

But with favorable demographics, a policy push to attract manufacturers looking for options outside China and a reprieve from high oil prices, few consider India at risk of a recession.

The Reserve Bank of India may not want investors to take the wrong cue from a potential curve inversion, which could explain why a recent auction was rescued by underwriters, surprising the market at a time when demand was sufficient, according to ICICI’s Ananthasubramanian. And while India’s borrowing target was below estimates for the coming fiscal year, it was still higher than the current one.

“The market will continue fearing that RBI can hike more, so the short end won’t find many takers and a flat curve can persist for months,” he said. “But I would rule out inversion on a long-term basis given supply is so heavily weighted toward duration.”

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow