Indian bonds to lose their appeal as RBI nears end of easing cycle: PineBridge

Bloomberg | Updated on July 20, 2020

Indian bonds may start losing their appeal as the Reserve Bank of India nears the end of its easing cycle, according to PineBridge Investments Asia Ltd.

“It is currently not an opportune time to invest in Indian bonds as yields will be back up from the current levels,” said Arthur Lau, head of Asia ex-Japan fixed income at PineBridge. The prospect of the RBI “nearing the end of the easing cycle” and a higher fiscal deficit will weigh on bonds, pushing benchmark 10-year yields to around 6 per cent by year-end, he said.

Lau expects a resurgence in inflation to limit the RBI to a quarter-point cut in the second half of 2020. That compares with economists’ expectations of a 50 basis points reduction to support a pandemic-ravaged economy that’s set for the worst contraction in four decades.

“We expect the inflation rate to normalise/stabilise going forward, with limited further room for RBI to cut,” Lau said in written responses to questions.

Last week, data showed consumer-price inflation unexpectedly quickened in June to 6.09 per cent -- above the upper end of the RBI’s 2-6 per cent target band, casting doubt on whether the RBI will cut rates in its next meeting in August.

A growing inflation threat may unwind gains in Indian bonds, which are the second-best performers in emerging Asia over the past three months, with 10-year bond yields plunging more than 40 basis points during that period. Bonds have been supported by the RBI’s fund injections through debt and dollar purchases, in addition to its 115 basis points rate cuts this fiscal year.

Continued Intervention

Lau expects the RBI to keep supporting the bond market to prop up growth and to facilitate a record government bond issuance of 12 trillion rupees this fiscal year. “We do think the RBI will continue to intervene in both rates and FX – and we see pressure on yields to be on the upside,” said Lau.

Foreign investors have sold more than $14 billion of Indian bonds so far this year in the worst debt outflow among emerging Asian nations. Moody’s Investors Service cut the country’s rating to a notch above junk last month, and Fitch Ratings followed with a reduction in the outlook to negative.

“The recent selling is related to rating agencies’ actions (or anticipated rating actions), as India is on the edge of losing its investment grade status,” Lau said.

Published on July 20, 2020

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