By Shubham Batra and Khushi Malhotra
NEW DELHI/MUMBAI (Reuters) -India’s short-term bonds, particularly in the up-to-five-year segment, are becoming more attractive amid the central bank’s continued liquidity infusions and expectations of further monetary easing, a senior LIC Mutual Fund executive said.
Singh expects five-year bond yields to fall 40–50 basis points to 5.6%–5.7% this fiscal year, assuming two to three rate cuts. LIC Mutual Fund, which managed about 170 billion rupees ($1.99 billion) in debt as of end-April, also sees the 10-year benchmark yield easing to 5.85%–5.86%, levels last seen over four years ago.
“A rate cut would impact long term (yields) as well, but there I feel government securities and liquid securities are the best bet for trading purpose,” Rahul Singh, senior debt fund manager at LIC Mutual Fund told Reuters’ Trading India forum.
The Reserve Bank of India’s repurchase rate stands at 6%.
Since the start of the financial year, the central bank has infused nearly 2 trillion rupees into the banking system through open market bond purchases and is set to buy another 500 billion rupees in May.
A large dividend transfer to the government is also expected to add to the liquidity surplus, LIC Mutual Fund’s Singh said. The daily average surplus currently stands at 1.5 trillion rupees.
“It (RBI dividend) should be close to 3 trillion rupees, much more than budgeted amount purely due to foreign exchange gains,” he said.
He added that this would be a key factor in determining the quantum of future open market purchases of government bonds.
“They need to do further (OMOs) depending on what kind of dividend comes and when that money is circulated back to the system once government spending starts.”
Singh also noted the RBI may opt for more open market operations (OMOs) given its sizeable short position in forwards.
The central bank’s net short dollar position in forwards and futures stood at $64.2 billion at end-March.
($1 = 85.2780 Indian rupees)
(Reporting by Shubham Batra in New Delhi and Khushi Malhotra in Mumbai; Editing by Nivedita Bhattacharjee)
