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The bond market is experiencing the corollary of Murphy’s law – called the Yhprum’s law – that states, “Everything that can work, will work.”
Just when market participants were beginning to worry about the absence of the G-SAP announcement last week, two things happened. First, the CPI inflation number at 5.3 per cent stood reasonably below the market expectations. Second, and a crucial factor, is the talk on Indian government securities’ inclusion in global bond indices.
Comments made by the Reserve Bank of India Deputy Governor Michael Patra assuaged markets regarding future monetary policy normalisation. “We don’t like tantrums; we like tepid and transparent transitions – glidepaths rather than crash landings,” said Patra.
Market participants believe that even if the economy starts to pick-up further and inflation continues to remain under control, any rate hike may still be far away. “The envisaged glidepath should take inflation down to 5.7 per cent or lower in 2021-22, to below 5 per cent in 2022-23 and closer to the target of 4 per cent by 2023-24,” Patra stated in his speech. Bond traders are of the view that with no upside shocks to inflation or the second half borrowing figure slotted to be announced later this month, there is no reason in the near term to discontinue the bullish stance. “If the second half borrowing figure comes in below or at the ₹5 lakh crore mark, it should be positive for the market,” a trader said.
On the cards
Steam picking-up on India’s inclusion in global bond indices is another crucial factor that could soften the yields further. Principal economic advisor Sanjeev Sanyal reportedly stated that preparatory work for the inclusion of certain G-secs in global bond indices is over and there could be some announcement pertaining to the matter this fiscal. The matter has been on the cards over the last few years.
Interestingly, so much has been talked about this matter over the last few years that at one point, bond traders simply began to ignore the sound bytes regarding any news on index inclusion. However, the conviction seems to be stronger this time and the same seems to be reflecting across the trading community.
Last week, the benchmark yield traded between 6.15 and 6.2 per cent. Bond traders say that in the absence of any major trigger in the immediate short term, the 10-year should continue to trade in the range of 6.1-6.2 per cent with a bias towards long positions.
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