India’s 5-15 year bond yields attractive once selloff settles, Invesco MF’s executive says

Five- to 15-year Indian government bonds will look attractive once the current selloff eases, as a steepening yield curve follows a central bank policy move that disappointed investors, an Invesco Mutual Fund executive said.

Indian bond yields continued to rise on Monday, led by longer maturities, after the Reserve Bank of India shifted to a neutral stance and delivered an outsized 50-basis-point rate cut last week. The five-year yield stood at 5.84%, while the 10-year benchmark hit a three-week high at 6.28%.

“Five-15 year bonds look attractive which has steepened post policy. In the absence of any further rate cuts, we would expect the 5-year bond yield to head towards 5.65%-5.70% levels and 10-year bond yield around 6.15%,” Vikas Garg, head of fixed income at Invesco Mutual Fund told Reuters’ Trading India forum.
The fund house manages assets worth 1.26 trillion rupees ($14.73 billion), as on March end.
“Fundamentally, demand-supply dynamics for government securities looks very favorable,” he said adding sees some rally in bond prices over the next few months.

Garg sees the policy as dovish, but said “the spanner” came with the change in stance. With a shift to neutral stance, he expects a prolonged pause on rates. “Towards the year-end, there may be a window to administer one more rate cut if we get negatively surprised on growth front, led by the global growth disruption.” The RBI also announced it will cut banks’ cash reserve ratio by 100 bps in tranches from September to November, which will infuse around 2.50 trillion rupees.

Garg said the move was a pre-emptive measure as RBI’s forward dollar book is likely to get unwound over next few months which otherwise would have sucked out liquidity from the system.

As a base case, Garg does not expect more open market bond purchases and expects liquidity to remain in the range of 1%-1.5% of deposits.

($1 = 85.5380 Indian rupees)