Indian bonds poised to extend losses on hopes of normalization

As the economic revival gains traction, Indian bonds are poised to extend losses amid growing expectations that the central bank will speed up its policy normalization.

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Rates on notes with maturities of up to two years have gone up in recent weeks as the central bank expanded its efforts to remove excess liquidity from the banking system, with the one-year bill yield rising to the highest since April 2020. The benchmark 10 year bond yield, on the other hand, has seen smaller gains.

Money-market rates and yields on shorter-maturity debt are likely to increase as traders expect the Reserve Bank of India to increase its liquidity operations with a possible increase in the reverse repo rate it uses to drain funds in the December policy review. Long-end bonds may be cushioned by expectations of a lower debt supply and the inclusion of Indian bonds in global indexes.

Pankaj Pathak, fixed-income fund manager at Quantum Asset Management Co, said the next logical step in the direction of policy normalization should be a hike in the reverse repo rate at the front end of the two year period. The spread between the one-year Treasury bill and the benchmark 10 year bond was 220 basis points on Friday after hitting a decade high in September due to record excess liquidity. The 91 day yield has climbed 23 basis points since August.

Shorter-maturity bonds are facing the brunt as they are more susceptible to RBI's operations aimed at reducing system liquidity, while longer-end bonds are relatively less impacted by optimism that faster economic growth will boost revenues and reduce bond supply. The benchmark repo rate will only be raised in the next fiscal year, according to strategists.

Traders are waiting for the central bank's next policy meeting on December 8. The economy expanded 8.2% in the September quarter from a year ago, after a 20.1% jump in the previous quarter.

Swap markets are already pricing in 40 basis points of reverse repo hike in December, according to ICICI Securities Primary Dealership Ltd.

Economic data shows that there is a gradual unwinding of easy monetary policy, in line with the global trend, and Reserve Bank of India Governor Shaktikanta Das has repeatedly said he will keep policy accommodative until growth gets back on a firm footing.

The yield on two-year bonds increased more than 30 basis points this quarter, while the 30 year yield dropped seven basis points. The yield on 10 year note rose ten basis points this quarter, fell four basis points to 6.33% on Friday amid concerns that a newly discovered coronaviruses could hurt the global growth outlook.

According to Shailendra Jhingan, chief executive atICICI Securities Primary Dealership, expectations of index inclusion are helping keep the longer end anchored.

Here are the key Asia Pacific data due this week:

On November 30: India GDP, South Korea industrial production, Japan jobless rate and industrial production, China PMI, Australia building approvals and current account balance, Thailand balance of payments, and more.

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