India 10-year bond yields rise for second month on liquidity withdrawal, rate cut doubts

MUMBAI: Indian government bond yields ended higher for the second consecutive month in July as the central bank ramped up its liquidity withdrawal and dented hopes of another rate cut, adding to investor uncertainty.

The yield on the benchmark 10-year bond ended at 6.3735% on Thursday, after closing at 6.3700% on Wednesday. The yield rose 5 basis points in July, after climbing 10 bps last month.

The Reserve Bank of India stepped up the use of variable rate reverse repos in July, conducting auctions with higher quantum and shorter durations. The central bank held its first VRRR in June.

Constant cash absorption by the RBI has left investors confused about the impact of a larger-than-expected rate cut delivered in June.

“Given the current market dynamics, we are constructive on the long end of the yield curve and recommend a barbell strategy, which is investing in both short-duration and long-duration debt,” said Abhishek Bisen, head of fixed income at Kotak Mutual Fund.

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“It is a balanced way to navigate an uncertain interest rate environment while optimising risk-adjusted returns.”

India’s retail inflation dropped to a more than six-year low last month, re-igniting bets that the RBI would cut rates once more in August. This also led to foreign inflows after heavy outflows in the first two-and-a-half months.

However, investor hopes were dampened after RBI Governor Sanjay Malhotra said monetary policy will place greater emphasis on the outlook for growth and inflation, rather than their current levels. The bar for further easing is higher than it would have been with an “accommodative” stance, he added.

Rates

India’s overnight index swap (OIS) rates traded in a narrow range through the month, with the shorter duration ending lower.

The one-year OIS rate ended at 5.51%, and the two-year OIS rate finished at 5.47%. The liquid five-year OIS rate ended at 5.73%, a tad higher than at June end.