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Below the Quote on Weekly Fixed Income by Puneet Pal of PGIM India Mutual Fund

Domestic Yields Rise While Long-End Finds Support Amid Global Volatility

Our View:

We continue to expect rate hikes by the MPC beginning in October, with a 50–75 bps rate hike by the end of FY2027 in order to keep real rates positive. In the near term, we expect the 10-year bond yield to trade in a range of 6.95%–7.25%.

The short end of the yield curve may continue to be supported by surplus banking liquidity and lower supply of CDs from banks due to FCNR inflows going forward. Investors with a short-term investment horizon can look to allocate to the 3–6-month maturity segment.

Indian Markets:

The Indian yield curve bear-flattened during the week as the US Fed and the BOJ hiked policy rates as per market expectations and kept the door open for further hikes. Domestically, yields rose up to the 15-year segment while coming down marginally at the longer end of the yield curve. The 5-year segment underperformed, with yields rising by 15 bps during the week, as RBI conducted INR 50,000 crore of OMO. The benchmark 10-year bond yield ended the week at 7.06%, higher by 2 bps.

INR remained range-bound even as Brent crude spiked intra-week to above USD 109/bbl before retracing lower and ending the week at USD 103.87/bbl. RBI is continuing its intervention in the FX markets as PFI outflows continue from both debt and equity. The trade deficit narrowed to USD 27 billion in August compared to USD 32 billion in July, mainly driven by exports. The Balance of Payments (BoP) was in surplus in July at USD 21 billion on the back of FCNR flows. The current account deficit widened to USD 7 billion in July. In FY2027, the current account deficit is expected to remain in the vicinity of 1%, though the trajectory of crude prices remains important for India’s external balances. CPI inflation is expected to come in at 5.50% next month and, with crude prices remaining above USD 100/bbl, there is a risk of a broad-based rise in prices across food and “core” categories if crude prices stay elevated for the next three to four months.

The OIS curve also flattened in line with the sovereign curve, as the 1-year OIS yield moved up by 4 bps during the week while the 5-year OIS yield remained flat. Short-term money market yields were higher as overnight lending rates rose towards the policy repo rate.

International Markets:

Global bond yields continued to stay elevated, with both the US Fed and the Bank of Japan increasing policy rates. The US yield curve flattened, with the shorter end of the US Treasury curve underperforming. The 10-year benchmark bond yield came down below the psychological level of 5%, ending the week at 4.99%. The 30-year bond yield, in contrast, came down by 3 bps during the week, closing at 5.32% 

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