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Nomura and StanChart predict worst over for India’s battered bond market & its buyers

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The gap has narrowed down to 52 points between RBI’s benchmark rate and the 10-year yield bond data, a key market centric, says StanChart.

Is the worst over for India’s much-battered bond market? Standard Chartered Plc and Nomura Holdings Inc. seem to think so.

The lenders are among investors who are adding to their Indian debt holdings, betting that the central bank will stay on hold for the rest of the year after raising interest rates last week for the second time since June.

“Current Indian government bond valuations already reflect most of the negative factors the market has been worried about in 2018,” Nagaraj Kulkarni, Asia rates strategist with Standard Chartered Bank in Singapore, wrote in a note.

Standard Chartered raised its three-month bond outlook to positive after the Reserve Bank of India kept its neutral policy stance last Wednesday and signaled that its rate increase isn’t the start of an extended tightening cycle. Nomura is bullish on five-year securities and has added to its holdings of debt due 2020, it said in note after the RBI decision.

“The market had become over-bearish on the quantum and the pace of hikes and is getting repriced,” said R. Sivakumar, head of fixed income in Mumbai at Axis Asset Management Co., which oversees around $11.5 billion in assets. “We advise investors to stay in short-to-medium term strategies.”

The gap between the RBI’s benchmark rate and the 10-year yield — a key market metric — has narrowed to 126 basis points from the year’s peak of 178. Even so, the spread is higher than the five-year average of 75 basis points, indicating further tightening is baked in, Standard Chartered says.

RBI's benchmark repurchase rate | Bloomberg
RBI’s benchmark repurchase rate vis-a-vis its 10-year sovereign bond yield | Bloomberg

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Bulls point to another reason to buy bonds: more open-market purchases by the central bank as it seeks to actively manage systemic liquidity.

Standard Chartered says it expects such purchases for the rest of financial year to total 1.35 trillion rupees ($19.7 billion). That means the RBI must increase its OMO run rate. It bought 300 billion rupees of securities in the three months through July, official data show.

State-run lenders, the largest holders of debt, and foreign funds are also returning to the market. The banks turned net buyers in June and July after being sellers in the first five months of the year, while foreigners turned bond buyers in July for the first time in six months. The yield on the 10-year notes has fallen 23 basis points to 7.76 per cent from a three-year high in early June.

The RBI is ahead of the curve and markets should view the outlook for both local debt and the rupee as constructive, said Anders Faergemann, a London-based senior fund manager at PineBridge Investments.

“Appropriate policy settings to reduce potential imbalances and strengthen macro stability should be well received by foreign investors and this can lead to reduction in outflows, if not resumption of inflows, into local debt,” he said. – Bloomberg

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