India’s bond curve is poised to flatten further as the Reserve Bank of India steps up liquidity withdrawals, prompting some investors to favor 10-year debt over five-year notes. The five- to 10-year yield gap is expected to narrow as the RBI drains surplus cash, pressuring shorter maturities, according to Industrial and Commercial Bank of China Ltd. and Anand Rathi Global Finance Ltd. The five-year yield may rise to around 7% from a current 6.94% if the central bank remains aggressive in its policy tightening, according to ICICI Securities Primary Dealership Ltd. Excess banking-system liquidity is prompting the RBI to withdraw funds, putting upward pressure on shorter-dated yields as it seeks to contain prices. The central bank has already withdrawn more than 1 trillion rupees ($10.4 billion), and the pace of further cash absorption, alongside any additional rate hikes, will determine how far the yield curve flattens.
Alok Sharma, head of treasury at ICBC in Mumbai, sees the five-year and 10-year gap narrowing to as much as 10 basis points and the curve turning flat or mildly inverted if overnight rates move meaningfully above the repo rate. Harsimran Sahni, head of treasury at Anand Rathi, recommends selling the five-year benchmark and buying the 10-year bond, a trade that would benefit from a narrowing yield gap. The next test comes Wednesday, when the RBI is expected to raise its policy rate by 25 basis points to 5.50%, according to a majority of economists surveyed by Bloomberg. It would be the first increase since February 2023, with any signal of a more aggressive tightening path likely to add pressure on the short end of the curve.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing