 "Upping long bond exposure beneficial for Indian investors, says Union AMC")
India's 10-year benchmark government bond yield could ease as much as 45 basis points (bps) in the first half of 2024, and fixed-income investors could benefit from increasing exposure at the longer end, the fixed-income head at Union Mutual Fund said.
"We expect the 10-year yield to be between 6.75% -7.00% in six months from now," said Parijat Agrawal, head of fixed income at Union Asset Management, which had assets worth 136 billion rupees ($1.65 billion) under management as of end-November.
"We expect interest rates to come down moderately in calendar year 2024. Investors may see growth if they take some duration exposure." India's benchmark 10-year bond yield eased by around 20 bps from the seven-month peak it touched in early October after fears of additional supply via open market bond sales to draw out banking system liquidity gripped markets.
Agrawal said the idea of the US Federal Reserve cutting rates is likely to nudge the Reserve Bank of India (RBI) towards lowering effective policy rates.
"We may see the change in stance first, followed by a cut in the policy rate towards the end of the first quarter of next fiscal year."
The RBI raised the repo rate by 250 bps in the previous financial year to 6.50% but has maintained status quo on rates and its stance in the last five policies.
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The Fed hinted at a pivot in its December policy, and signalled three potential rate cuts totalling 75 bps in 2024.
The U.S. central bank has hiked rates by 525 bps between March 2022 to July 2023.
Market participants, however, seem far more aggressive in pricing in Fed rate cuts. They expect nearly 150 bps worth of reduction, with the first cut seen as early as March.
On the domestic front, the RBI's rate cut cycle is widely expected to be shallower, with Agrawal expecting an easing of only 25-50 bps in 2024.
However, the bond market sentiment will remain positive, in line with global central banks' narrative, reduced concerns over fiscal deficit and prospects of continued foreign inflows from the inclusion of bonds in the JPMorgan emerging market debt index, he added.