By Christina Titus
Indian G-secs are unlikely to attract foreign inflows in the near-term as global yields are high, believes Rajeev Radhakrishnan, CIO – fixed income at SBI Mutual Fund. He tells Christina Titus, that the Reserve Bank of India’s (RBI) change of stance has been a bit of a dampener for transmission. Excerpts:
With RBI cutting cumulatively 100 bps since February and then a change in stance in recent policy, what is your view of the debt market?
The recent policy delivered a set of measures, which were a bit unanticipated. The change in stance and 50 bps repo rate cut were a surprise, but the biggest one was the reduction in cash reserve ratio (CRR), that too on a forward basis. But when you look back, there is a merit in front loading actions, as it helps in faster transmission. However, the whole communication around the stance change had given a bit of dampener to some of the transmission that happened in the market over the last few months. Consequently, yields on short-end bonds rose 20-25 bps, neutralising the transmission. But when you look at the yields a year or even three months back, it came down materially.
One point which is still open and unaddressed is what is their (RBI’s) operating target whether it is near SDF (Standing Deposit Facility) or between SDF and repo. With a massive liquidity surplus, the overnight rate trades below SDF currently. I do not think they are in a hurry to align to repo. To determine that, I would want to wait for more actions and clarity with respect to the frequency of VRRR.
Do you see scope for more rate cuts?
I would assign a very low probability for an additional cut because it is not going to move the needle anyways. I believe that we will likely remain on a pause at least for the remaining part of the fiscal year. Unless growth surprises on negative, there is no reason to move again.
Given the global uncertainty and the approaching deadline for Trump’s tariff, where do you see yield on Indian government bonds to perform in the near future?
I expect the yield on 10-year benchmark bond will remain range-bound at 6.30% level in the near-term. Global environment is not very conducive. Even if the global environment becomes further unfavourable, I don’t see any spike in yields because of the domestic support, increased liquidity and weak credit offtake. Once we move into a busy season when credit picks up, we need to relook at the dynamics.
The lower range will unlikely break due to lack of visibility on further capital gains. If yields move 4-5 bps lower, people will start booking profit. That 4-5 basis around current level could be the trading range for the foreseeable future.
Foreign portfolio investors have been selling in past three months. When can we expect a rebound?
The recent outflows were majorly on account of profit booking. There were significant inflows into FAR securities since the announcement of including Indian bonds in JP Morgan Emerging Market Index, prepositioning themselves. Additionally, the RBI has indicated limited policy space. The funds that would normally have flowed in for the capital gain have already done so and reaped the rewards.
In the last three months, rising global yields and a steep yield curve have made developed market bonds more attractive, prompting some investors to repatriate funds. In light of the present environment, Indian government bonds are unlikely to receive any offshore flows. Going ahead, it will depend on the US Federal Reserve’s decision.
Has inclusion of sovereign bonds in global indices really helped the Indian debt market?
It has created an added demand. When investors prefer to diversify into emerging markets, India should be able to receive a reasonable amount of money through offshore channels over a period of time due to the country’s strong macro position. Being part of the index, India will continue to receive those inflows. However, taking the current situation into account, it is hard for emerging markets to attract foreign investments, owing to high global yields. This is a challenge at this point.
How do you foresee green bonds and ESG debt instruments segment evolving in India?
There is no investor demand in this segment domestically. The issuances in the segment have not picked up yet as issuers are not happy with the premium. I don’t think it will pick up unless there is a demand or a pool of money that is mandated to do that and it will be a gradual process. No market develops without a demand. I think demand needs to be incentivised.