Indian Bonds Loosening Ties With US Peers, Focus More On Domestic Factors

Yields on India’s sovereign papers are not feeling the same pressure like before from the surge in US Treasury yields due to an emerging divergence from the US debt.

On worries that interest rates may remain elevated in US, yield on the benchmark US note rose to a 16-year high this week. This led to a rise in yields on domestic government bonds back home even when traders were exercising caution ahead of the Reserve Bank of India’s Monetary Policy Committee’s decision, due on Friday.

Yield on the 10-year US Treasury note closed at 4.77 per cent at the end of Indian market hours on Wednesday, while that on the 10-year domestic benchmark government bond settled at 7.24 per cent.

Typically, yields on sovereign papers in India are seen moving in tandem with those on its US peers in order to maintain the spread between their rates.

Limited Impact

However, when compared the increase from Friday, the impact of the surge in US yields was minimal because of a less hawkish scenario in India than US. Last week, the yield on the domestic benchmark government bond had closed at 7.22 per cent, when benchmark US note yield was seen at 4.56 per cent.

“As per the recent trends, Indian bond yields have not been closely following the US yields and focusing more on the macroeconomic factors at home,” said bond market veteran, Venkatakrishnan Srinivasan.

Considering the absence of any ambiguity around RBI’s policy stance and decision on the repo rate, debt market participants in India are of view that the MPC outcome scheduled on Friday will likely be a non-event for the financial markets.

The central bank is expected to keep the repo rate unchanged at 6.50 per cent for the fourth consecutive time and retain its policy stance at “withdrawal of accommodation.”

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Another domestic factor that has been priced in by the investors at home is India’s retail inflation print coming back within RBI’s tolerance band of 2-6 per cent. The Consumer Price Index (CPI) inflation print for September will be released on October 12, and is expected to come between 5.5 per cent and 5.8 per cent.

“The domestic macros are in control and yields are expected to remain elevated for some more time,” said Mahesh Agarwal, National Head of Wealth at AUM Capital.

Different Scenarios

Meanwhile on the US front, recent hawkish remarks from officials of the US Federal Reserve signal that rate cuts in US are far from sight with another rate hike still on the cards for 2023.

Such a difference in the scenarios has made conditions favourable for India in terms of independence, according to market experts, who believe that domestic yields may soon further reduce their ties with US yields.

This sentiment among investors puts the Indian government in a better position for its borrowing plan of Rs 1.24 trillion through bonds in October.

However, the reduction in spreads with US has offset the impact of India’s inclusion in the JP Morgan emerging markets bond Index by making domestic papers less attractive for foreign portfolio investors.