HALISTER1: RESEARCH ROUNDUP: Indian Bond Rally to Extend on Yield, Monsoon

RESEARCH ROUNDUP: Indian Bond Rally to Extend on Yield, Monsoon

(Bloomberg) -- Indian govt bonds rally looks set to extend, thanks to a healthy monsoon, renewed surplus in bank liquidity and hunt for yields as investors face declining returns around the world, analysts say.
  • 10-year yield fell four straight weeks, dropping 23 bps to trade at 7.28% currently; closed at 7.27% on July 15, lowest in 3 years on closing basis
  • Foreign funds bought 61.8b rupees ($920m) of bonds over past eight sessions, longest buying streak since Feb. 2015
  • Core liquidity turned broadly surplus from July after RBI conducted 800b rupees of OMOs since April policy
  • New RBI governor awaited as Rajan’s term ends early Sept.
  • HSBC (Himanshu Malik, Hong Kong-based rates strategist)
    • Key driver near term likely to be improvement in liquidity conditions
    • Progress of monsoon rainfall may have moderating impact on food prices in coming months
    • Front-end of bond yield curve has scope to go lower given improving liquidity; have been recommending receiving position in 1-year offshore swaps
    • Monetary policy continuity will be important; any change in bias towards more easing may lead to steeper yield curve and higher risk premium in bond yields
    • Maintain forecast for 10-year yield to reach 7% by end-2016
  • Nomura (Vivek Rajpal, Singapore-based senior rates strategist)
    • Bond-bullish trade in India is a real yield compression strategy which should be driven by better liquidity and monetary easing expectations
    • Yields should consolidate at current levels; may see another downleg in rates after consolidation as markets become more confident of sustainable surplus liquidity
    • RBI likely to maintain proactive stance on liquidity and the new governor’s interpretation of real rate framework
  • Standard Chartered (Nagaraj Kulkarni, Singapore-based senior strategist)
    • Bonds rally on peaking CPI inflation, improvement in liquidity and local investors build-up in long positions
    • Rally has legs, as valuations still attractive
    • RBI to support the banking system with sufficient liquidity; redemptions of non-resident deposits coming up may lead RBI to hold more OMOs
    • Belly of curve (7- to 10-year segment) is likely to benefit from both easing liquidity conditions and duration gains; prefer to buy the 7.68% 2023 IGB for target 7%
  • Fullerton India (Arvind Sampath, Mumbai-based head of treasury)
    • Bulk of uncertainty over Fed rate hikes, monsoon, and Brexit is over
    • Rupee is fairly stable and India is yielding positive returns compared to other sovereign bond markets
    • Core inflation looks comfortable in 4.5% zone; sees one more 25 bps rate cut in 2016
    • Expect 10-yr yield to drop to 7.10%-7.15% and then subsequently the 5-year segment rallying towards the repo rate
    • Rates rally has yet to play out in the corporate bonds
  • Societe Generale (Amit Agrawal, Bengaluru-based rates strategist)
    • Expect a further small rally this year with yield likely at 7.25% by end-Dec.
    • Yields should move higher next year due to higher central govt pay, risks of govt bond supply and risks of relaxation of long term inflation target
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Amit Agrawal (Societe Generale SA)
Arvind Sampath (Fullerton India Credit Co Ltd)
Himanshu Malik (HSBC Securities Asia Ltd)
Nagaraj Kulkarni (Standard Chartered PLC)
Vivek Rajpal (Nomura Holdings Inc)

Topics
Weather

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