US Yields, Inflation, Crude Oil Prices To Dictate Bond Trends In Near Term: Report

CareEdge Ratings in a report on Tuesday has said that it is expecting United States (US) yields, inflation and crude oil prices to dictate bond yield trends in the near term. 

In its monthly debt market report for October 2023, the rating agency stated, "We expect the 10-year benchmark bond yield to trade within the 7 to 7.2 per cent range by the end of FY24."

Notably, the report mentioned that India’s inclusion in JP Morgan’s emerging market index effective June 2024 could bode well for bond yields and the local currency in the medium to long term. 

Markets expect the staggered ten per cent weightage for India over ten months to attract overseas inflows of around USD 20 to 30 billion. While this would be favourable for Indian bond yields in the long term. 

The ten-year benchmark bond yield remained elevated at multi-month highs following a hawkish Reserve Bank of India (RBI) MPC meeting amidst a sharp rise in US yields and crude oil prices. 

Although RBI left the repo rate and policy stance unchanged at the October MPC meeting, bond markets witnessed a sell-off in reaction to the central bank’s hints of open market operation (OMO) sales auction of government securities to mop up any buildup of excess liquidity.

It also stated that outflows due to advanced tax and GST, amidst healthy credit demand, led to deficit liquidity in the banking system. Average monthly banking system liquidity slipped to a deficit of Rs 13,000 crore in September compared to a surplus of around Rs 12,000 crore in the previous month. 

As a result, overnight call rates rose as high as 6.82 per cent during the month and remained well above the repo rate for most of September. With call money rates firming, banks also resorted to borrowing from the MSF window instead to fulfil their liquidity requirements. 

Banks borrowed around Rs 40,000 crore via the MSF window in September. 

Due to tightening liquidity conditions, the two to ten-year yield curve witnessed mild inversion. Given the pressure on the rupee and underlying inflationary risks, it is likely that RBI would prefer to keep liquidity tight and intervene via variable rate auctions mainly to ensure credit offtake does not get hampered.