India’s bond selloff seen ending on RBI

Bloomberg

India’s bonds are poised to rally after a three-month slide as the central bank is set to resume cutting interest rates, according to Canara Robeco Asset Management Co.
A 25-basis-point rate cut is a ‘high probability’ for the December policy meeting, says Avnish Jain, head of fixed income at the Indian joint venture of Dutch asset manager Robeco Groep NV. The benchmark 10-year bond yield may drop to 6.50% before the decision, based on expectations the Reserve Bank of India (RBI) will ease, he said.
A sudden slowdown in India’s economy, which has prompted speculation of stimulus spending, is turning around expectations the RBI has finished easing. Uncertainty over how to read recent inflation data is also splitting views with money managers including DSP BlackRock Investment Managers Pvt citing rising consumer prices as a reason to sell sovereign bonds.
Taking a longer-term view on inflation, rather than just looking at recent data, provides a different perspective, said Jain, whose company oversees the equivalent of $1.83 billion. “The markets are pretty sanguine on inflation. They know inflation is not going much higher with most estimates seeing CPI around 4 % by March.”
India’s benchmark 10-year bond yield climbed to as high as 6.79% this month from as low as 6.40% on 24 July. The yield was at 6.76% on Wednesday.

Long Positions
Canara Robeco added to its long positions in government bonds after the RBI’s October meeting, when the central bank kept its policy rate at 6% while maintaining a neutral stance. That disappointed some investors who were looking for it to soften the stance on inflation.
“The long-end of the curve is a bit illiquid and we are more concentrated in the 10- to 15-year part. Inflation unexpectedly slowed to 3.28% in September, reviving calls for a rate cut. Even if RBI wants to hold in December, a reduction is probable in February”, Jain said.
“The market believes a rate cut is coming, it just doesn’t know when,” he said.
Bond yields may fall to 6.3% to 6.4% by March if the central bank eases, Jain said. Canara Robeco isn’t too worried about the possibility of some slippage by the government on its fiscal targets, with bond markets factoring in it would have to sell 250 to 500 billion rupees of
extra debt, he said.
The central bank will probably be comfortable with a small deviation in the fiscal deficit, he said.
Finance minister Arun Jaitley said late September that India needs to find a balance between fiscal prudence and spending as he tries to dig the economy out of its deepest slump in three years.