Halister News

(Bloomberg) -- India govt bond yields are biased lower and may consolidate in Sept. as it approaches the 7% level, Mumbai-based Manish Wadhawan, managing director and head of interest-rate trading at HSBC, says in interview.

• Benchmark 10-year yield is currently at 7.10%; dropped to 7.08% last month, levels last seen in 2009
• “I don’t see the market overheated, no signs of worry even at 7%,” says Wadhawan
  • Yield curve has flattened as spreads have collapsed
  • Further flattening looks difficult unless market starts to build in expectations of a bigger-than-25 bps cut
  • “A large part of the bond rally has happened and is getting reflected in prices. From here, market will seek more information,” says Wadhawan
• Improved macro-fundamentals in terms of lower current- account deficit, controlled fiscal deficit and low inflation have helped the current bond rally
• A rate cut would definitely help bonds, but keeping system liquidity neutral will be equally important
  • RBI’s OMOs have infused liquidity and taken away some of the long-end supply
  • Sept. and Oct. will be in liquidity surplus; sees systemic liquidity surplus rising to 1t rupees ($15b) ahead of the non-resident deposit redemptions and then returning to neutral
• Govt bonds aren’t seeing large incremental demand from foreigners as most are adequately stocked up
  • 95% of govt bond limits available to foreigners have been utilized, NSDL data shows
• NOTE: RBI reiterated in Aug. it will front-load liquidity needs of the banking system ahead of an est. $20b outflow in maturity repayments to non-resident Indians starting this month
• NOTE: New RBI chief Patel faces first test as $20b outflows lined up
• NOTE: Patel takes charge at India’s central bank with eye on inflation