Local bond yields ease on US rate hints; RBI liquidity moves in focus

economictimes.indiatimes.com:

Federal Reserve's hints of rate cuts in 2024 and a plunge in US bond yields have paved the way for Indian sovereign bond yields to ease, although a sustained drop in borrowing costs would hinge on how the Reserve Bank of India (RBI) manages liquidity amid its battle against inflation.

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