A rally in Indian sovereign bonds may come in the second half of the year as the central bank is likely to cut policy rates twice more, according to a two-decade veteran of the debt market.

Given that we have a governor whose take is that the Reserve Bank of India (RBI) should work toward bringing back growth, rate cuts are possible as early as April, said Neeraj Gambhir, former head of fixed income at the local unit of Nomura Holdings Inc. He expects the yield on the most-traded 2028 bonds to drop as low as 7 per cent by year-end, a level last seen in November 2017.

For now, concerns about India's planned record debt sale, uncertainty about upcoming elections and higher oil prices have set bonds on course for a second monthly decline. Yields may climb as high as 7.75 per cent in the next quarter before falling as some of these worries start to fade, said Gambhir, who in June correctly predicted the RBI would buy bonds to halt a yearlong selloff.

RBI’s chief, Shaktikanta Das, has flagged growth concerns and kept the door open for more rate cuts after a surprise reduction this month, minutes from the latest policy meeting showed. Das pointed to a slowdown in consumer inflation to 2.05 per cent in January -- well below the medium-term target of 4 per cent -- to justify the decision.

You are looking at a situation where growth is weakening at the margin and inflation is likely to remain below the RBI’s target next year, Gambhir, who has been tracking the debt market for 24 years and now runs an advisory firm, said in an interview.

Five-year debt looks the most exciting as the bulk of the central banks purchases are in the shorter-end of the yield curve, he said. The yield for these securities may drop to 6.75 percent by end-December, from 7.06 per cent at present, he said.

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