India’s shorter bonds are expected to underperform against longer-term peers due to tightening liquidity and anticipated monetary tightening. The Reserve Bank of India may raise interest rates by up to 75 basis points in the coming months, following a 25-basis-point hike in October. Excess liquidity in the banking system has declined sharply from a record high in September, reducing market appetite for rate-sensitive short-term securities.
The yield spread between five- and 10-year bonds narrowed to 32 basis points from 37 in August, with analysts expecting further flattening or even temporary inversion if liquidity is withdrawn aggressively. Short-term yields have surged to their highest level in over a year, raising funding costs for banks and corporations. The government canceled a recent treasury bill auction as yield demands increased.
Despite a recent dip in yields due to falling crude prices, inflation concerns remain, with retail inflation likely hitting the RBI’s 6% tolerance ceiling. Analysts warn that sustained inflation and global capital competition will keep the yield curve flat, with elevated floor levels on yields.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing