India's 10-Year Bond Yield Dips On Index Inclusion, Fed Cut Hopes
On Monday the benchmark yield touched 7.006%, the lowest level since June 13, 2023.
The 10-year bond yield in India has touched a nine-month low, driven by a significant correction in the U.S. Treasury market.
This adjustment was triggered by the U.S. Federal Reserve's commentary, which affirmed the likelihood of a rate cut in June, according to analysts.
News on bond index inclusion and the expected increase in flows are contributing to the downward pressure on yields. As a result, a further decrease in yields can be expected as more funds enter the market, they said.
The market is also possibly factoring in one rate cut by the Reserve Bank of India, according to Anil Bhansali, head of treasury at Finrex Treasury Advisors.
As of 1:31 p.m., the 10-year benchmark yield was trading at 7.02%, two basis points lower in comparison to Monday's close, according to Bloomberg data. On Monday, the benchmark yield touched 7.006%, the lowest level since June 13, 2023.
Normally, an inversion of the yield curve is regarded as an indicator of imminent recession. But this correlation between yield curve inversion and recession is found only in developed countries, not developing countries like India, according to VK Vijayakumar, chief investment strategist at Geojit Financial Services Ltd.
The inversion happened here due to higher-than-expected cutoffs on treasury bills sales, which, in turn, was triggered by deficit in the liquidity in the banking system, Vijayakumar said.
This declining trend in liquidity and inversion of the yield curve is likely to continue for some more time. But this is not going to impact India's gross-domestic-product growth in the current financial year, he said.
The news on bond-index inclusion has also attracted huge inflows from the foreign portfolio investors in the debt market, according to Kunal Sodhani, vice president of Shinhan Bank.
The easing outlook for inflation, especially core inflation, and lower-than-expected fiscal numbers and borrowing calendar provided impetus in pulling yields lower. The broader range will be 6.95–7.10% in the near term, Sodhani said.
