HALISTER1: ROUNDUP: India’s Cash-Driven Bond Rally Factors in Dec. Rate Cut

ROUNDUP: India’s Cash-Driven Bond Rally Factors in Dec. Rate Cut

(Bloomberg) -- India’s bond rally on the back of large deposits coming into its banking system may have mostly run its course for now as markets have priced in a 25bps rate cut by RBI at Dec. 7 meeting, according to traders.
  • Benchmark 10-year yield has fallen 47bps to 6.33% since PM Modi’s surprise announcement on Nov. 8 that scrapped high- value currency notes; plunge in domestic yields has bucked uptrend in global yields spurred by expectations of fiscal expansionary policies from U.S. President-elect Trump
  • Spread between 10-year govt bond yields in India and the U.S. has narrowed to 400bps, lowest since May 2010
  • Indian banks got 5.12t rupees ($75b) in deposits after nation’s demonetization, RBI says in statement; global funds, meanwhile, have sold net 120.4b rupees of local bonds since U.S. presidential election outcome on Nov. 9
  • DBS (Ashish Vaidya, Mumbai-based head of trading)
    • Focus is on how much cash ultimately remains in banking system; estimates about 4t-5t rupees would be positive for local government securities
    • Markets are pricing in a 25bps rate cut by RBI in December, with a dovish policy stance
    • In short-term, local bond yields may have mostly bottomed out; sees Fed’s likely rate hike next month and FOMC statement as key in determining future movements in domestic yields
  • FirstRand (Harihar Krishnamoorthy, Mumbai-based treasurer)
    • Total amount of deposits that stay in banking system will be a key focus once full withdrawals are allowed; 1.5t rupees of deposits are scheduled to flow out in November due to non-resident deposit maturities
    • Markets are pricing in a 25bps rate cut by RBI in December, which is justified by inflation readings
    • Higher cost of funding for foreigners and weaker rupee suggest that overseas investors’ buying of local govt debt could be limited
    • India’s 10-year yield is likely to bottom out at 6.25% for now
  • IndusInd Bank (Shyamal Karmakar, head of rates & credit trading)
    • Abundant liquidity and expectations of “radical” easing by RBI are driving demand for local govt debt; says bond market is ignoring external factors such as USD strength and sharp rise in global yields
    • Demonetization may be a game changer but early signs of actual impact would likely be visible only by January/February; if any “radical” rate cut was to happen, February meeting could be good time as budget would have been presented by then
    • Local bonds will probably maintain their uptrend, despite negative factors such as sporadic bouts of foreign selling
  • SBI DFHI (Ram Kamal Samanta, vice president for treasury)
    • Yield curve is expected to bull-steepen as banking system awash with cash means fewer OMOs
    • Markets have factored in a 25bps cut by RBI in December
    • Need to monitor impact on India’s fiscal situation from PM Modi’s surprise announcement on Nov. 8
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Ashish Vaidya (DBS Group Holdings Ltd)
Harihar Krishnamoorthy (FirstRand Ltd)
Ram Samanta (SBI DFHI Ltd)
Shyamal Karmakar (IndusInd Bank Ltd)

To de-activate this alert, click here

UUID: 7947283