“The 10-year yield may trade in the 7.00%-7.40% range in the near term,” V Lakshmanan said, adding that yields could drop 10-15 basis points if Indian bonds make their way into JPMorgan’s emerging markets bond index.
Chances of yields hitting 7% in the near term are higher, although they could climb in the second half of the financial year, Lakshmanan said.
Goldman Sachs said last month it expects an inclusion in 2023, while a media report said JPMorgan was in talks with major investors to include India in its bonds index.
The benchmark 6.54% 2032 bond was trading at 7.12%, and is down 19 basis points since Aug. 1, while the new 10-year bond yield is down 20 basis points since its debut on Aug. 19.
The fall in yields has been driven by rising hopes of an index inclusion, which could lead to around $30 billion in passive flows, and the recent drop in oil prices.
“The stories in Europe and China are leading to fears of recession and it has the potential to keep oil prices low which would benefit bonds,” Lakshmanan said.
Lakshmanan also believes that the bulk of the Reserve Bank of India’s policy tightening is done and it may raise the repo rate by a maximum of another 60 basis points.
“From a terminal rate standpoint, I would factor in the rate at 5.75%-6.00%. The governor is confident that inflation is heading in the right path, so the RBI could hike by 35 bps followed by 25 bps and see how the inflation is faring,” Lakshmanan said.
The RBI has hiked the repo rate by 140 basis points to 5.40% from May to August, as it aims to bring down inflation within its 2%-6% target band.
Lakshmanan, however, said the yield may head back to 7.35%-7.40% if there are no updates on bond inclusion prospects.
He expects some rupee weakness to persist, given the broad strength of the dollar.
“Having said that, we reckon that the RBI has sufficient ammunition to support the rupee and, in the short-term, it will need to use it.”
The rupee has stayed close to the record low of 80.12 per dollar it hit last month. Lakshmanan said he does not expect the RBI to be “dogmatic” about protecting the 80 level.