Indian government bonds came under pressure this week, with the benchmark 10-year yield moving above 7% as higher crude oil prices, a global debt-market selloff and concerns over the liquidity stance weighed on sentiment.
However, analysts believe domestic economic conditions remain the key factor determining the direction of Indian bond yields, rather than movements in global yields alone.
Domestic economic factors drive Indian bond market
India’s bond market is increasingly being driven by the country’s growth and inflation outlook, fiscal deficit trajectory and other domestic economic factors, according to Manish Banthia, chief investment officer for fixed income at ICICI Prudential AMC, as reported by Mint.
Banthia said elevated global yields do not necessarily mean Indian bond yields will move higher in tandem.
India’s bond market, he noted, is becoming less dependent on US and other global yields, with the historical correlation between dollar yields and emerging-market bond yields weakening significantly.
Oil rally triggers global bond selloff
The recent surge in crude oil prices has unsettled global debt markets. Rising energy costs have increased concerns about inflation and prompted investors to reassess the possibility of an interest-rate hike by the US Federal Reserve.
The US 10-year Treasury yield moved toward 5%, adding pressure to bond markets across several economies, including emerging markets.
Despite this, Banthia argued that India’s bond yields are increasingly determined by domestic fundamentals instead of simply following movements in US Treasury yields.
Indian 10-year yield crosses 7%
The yield on India’s benchmark 6.94% 2036 government bond rose 5 basis points to 7.0233%, its highest level in more than three months. The benchmark yield has increased by 6 basis points this week, marking its fourth consecutive weekly decline in bond prices.
The five-year government bond faced even stronger selling pressure. Its yield jumped 10 basis points during the day to 6.6202%.
The recent moves have revived concerns that rising global yields could continue to put pressure on emerging-market bonds such as India’s.
Global yields may have already peaked
Banthia, however, believes may not continue their upward trajectory and could instead move lower.
He pointed to the sharp rise in Japanese government bond yields as an example. Japan’s 10-year yield has moved from around -40 basis points to nearly 3%, while its 30-year yield has risen from roughly 50 basis points to around 4%.
At the same time, inflation remains below 2%, resulting in unusually high real yields.
In the US, the 10-year Treasury yield is around 4.8% and the 30-year yield is near 5.3%, levels close to 15-20 year highs, even as core inflation has flattened around 2.5%.
RBI rate outlook
On the RBI’s monetary policy stance, Banthia said India is currently in a different economic cycle from the US.
The RBI reduced interest rates last year when economic growth was weak. However, the domestic economy has since recovered and is now expanding at a more normal pace.
According to Banthia, markets have already priced in roughly 75-100 basis points of interest rate increases in India over the coming year.
As a result, he said, an RBI rate hike at this stage would not necessarily come as a major surprise to the bond market.