Traders see liquidity tightening in India to drive bond playbook in 2021

There's growing consensus among traders that the RBI will have to start draining excess cash from the banking system, as abundant liquidity crashed short-term rates and threatened to stoke inflation

India’s sovereign bond investors are converging on a trade idea for 2021. They’re betting that short-term yields would rebound as the central bank soaks up excess cash on signs of an economic recovery.

RBL Bank Ltd. and Quantum Asset Management Ltd. are among those forecasting that liquidity tightening by the Reserve Bank of India will lead short-end rates to rise faster than the long-end -- bear-flattening the yield curve.

“Short-end rates, of up to three years maturity, are currently priced aggressively due to excess liquidity and thus carry maximum risk of a reversal,” said Pankaj Pathak, fixed-income fund manager at Quantum Asset