Easing sovereign bond yields make it cheaper for companies to raise money through bonds, as corporate borrowing costs are benchmarked to the rate of interest that the government pays to raise funds through debt.
Since the US Federal Open Market Committee’s policy statement on December 13, yield on the 10-year benchmark Indian government bond has dropped by 10 basis points (bps) to close at 7.16% on Friday.
The Fed left interest rates unchanged while a majority of its officials signalled lower interest rates in 2024. Yield on the 10-year US treasury note has nosedived around 30 bps since the Fed policy, in turn making higher-yielding Indian fixed-income assets more appealing for investors.
Lower US interest rates typically propel overseas investment into Indian financial assets. With foreign funds likely to step up investment into Indian bonds ahead of their inclusion in JP Morgan’s emerging market index in June 2024, local bond yields have room to head much lower, traders said.
“While the RBI has been very clear that it is driven by domestic considerations, the change in the US rate view provides the (Indian) central bank comfort. We could see the 10-year bond yield in a range of 7.00-7.10% in January-February as more foreign investment comes in ahead of index inclusion. What will need to be very carefully watched is the RBI’s approach to liquidity at that time,” said Naveen Singh, head of trading at ICICI Securities Primary Dealership.
Foreign portfolio investors net bought Indian debt worth $1.78 billion in November, the highest monthly purchase since October 2017. FPI net investment in domestic debt was $1.07 billion so far in December.”The 10-year G-sec is expected to soften through February due to cooling inflation, fiscal consolidation, a possible downside to oil prices due to global growth slowdown and continued strong foreign capital flows into India’s debt markets,” wrote Crisil’s economists.
RBI COMFORT
While some bond traders interpreted a recent announcement by the RBI as a sign of it tilting towards easier liquidity, others were more circumspect, given the central bank’s unwavering commitment to bringing inflation down to 4%.
Over the past few months, the central bank has tolerated tight liquidity conditions in the banking system, with money market rates remaining elevated.