Rate-Hike Bets Unwind in India’s Bond Markets With Virus Surge

(Bloomberg) -- A record jump in coronavirus cases in India is leading the nation’s bond traders to pare bets that the central bank will shift to a tighter policy stance as early as this year.

Shorter-maturity rupee debt rallied, with yields on the 5.22% 2025 bond and the 5.15% 2025 debt sliding 12 basis points to 5.47% and 5.59%, respectively. The rally was also aided by a government borrowing plan for the new fiscal first half, with issuances tilted toward longer-end bonds.

Traders are recalibrating bets for India’s rate outlook after an unprecedented increase in virus infections triggered curbs on movements in the nation’s richest state. Expectations had been building that the central bank could start to tighten policy this year, with investors awaiting a review on Wednesday for clues.

“If the Monetary Policy Committee was thinking of reacting to inflation pressures, Covid might stay their hand and they won’t do anything,” said Harihar Krishnamoorthy, treasurer at FirstRand Bank in Mumbai. “Most people had been expecting that in the second half of the year, we would start to see rate hikes start to begin.”

All 27 economists in a Bloomberg survey expect the Reserve Bank of India to keep the benchmark rate on hold on Wednesday.

Supply factors also drove the bond rally after the fiscal 2022 first-half borrowing calendar released last week showed issuance tilted toward the long end. Debt with maturities of over 30 years accounted for 27.5% of total issuance, compared with 21.5% a year ago, according to a note from Kotak Mahindra Bank Ltd. Securities due in less than five years made up 24.7% of the total, versus 31.4% previously, it estimated.

The pattern of issuance suggests pressure will weigh more heavily on the longer end of the yield curve, said Madhavi Arora, economist at Emkay Global Financial Services Ltd. The RBI will need to conduct 4.5 trillion to 4.8 trillion rupees ($61 billion to $65 billion) of open-market operations this fiscal year, she said.

The curve steepened as the benchmark 10-year yield fell two basis points. Five-year interest-rate swaps dropped 10 basis points to 5.15%.

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