“ By Dharamraj Lalit Dhutia
MUMBAI, Oct 7 (Reuters) - The selloff in Indian government bonds may pause,
with the benchmark 10-year yield consolidating around the 7.50% level, as the
central bank is likely to soon shift focus from inflation to economic growth, Bank of Baroda's
head of treasury said Friday.
"Our view is that the 7.50% level is what the yield will settle at the top end," said Sushanta Mohanty, general manager-treasury
at Bank of Baroda.
"There may be some sporadic move above 7.50% and we may see value buying at 7.50% and above, provided there are no global geopolitical shocks."
India's 10-year benchmark 7.26% 2032 bond yield was trading at 7.51%, up
11 basis points (bps) so far this week after rising 21 bps in September.
However, Mohanty currently prefers 10-year bonds as
he expects "some more pain" for shorter-term debt.
The Reserve Bank of India has hiked its repo rate by 140 basis points from May through September to tackle elevated inflation, including a 50 bps increase on Sept.
30 that did not lead to any major selloff in bonds.
Mohanty expects the RBI may only go for another 35 bps hike before taking a pause as it needs to maintain a balance.
"The general consensus seems to be another 50-60 bps of rate increases. Our view is that after the repo rate reaches the 6.25% level, the RBI may need to take a pause and take into consideration the impact on growth," Mohanty said.
India's headline retail inflation is expected to have stayed above the RBI's
tolerance range for the ninth straight month in September, but Mohanty
expects inflation to ease in coming months.
He also doesn't believe that the delay in the inclusion of Indian bonds in global indexes will push up yields incrementally as foreign ownership of bonds has remained muted over the past couple of years, with the bulk of
the demand from local players like banks, mutual funds, insurers and some corporates.
Earlier this week, J.P.
Morgan refrained from adding Indian bonds to its emerging market local currency
debt index this year, as was hoped for.
"Even without index inclusion in the current half, bond supply will go through with domestic players acting as buyers."
Mohanty expects demand from banks to remain strong as a pickup in government spending in the second half will improve liquidity, while a rise in banks' deposit
base would give lenders leeway to add more debt.
(Reporting by Dharamraj Lalit Dhutia; Editing by Savio D'Souza)
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