“Forward maturity- one of the reason to build up liquidity in the system “


Sudhir Agrawal, EVP & Debt Fund Manager


Indian bond yields have fluctuated substantially recently. The recent rally in the domestic bond market was triggered mostly by three factors.


The biggest one was the overall rally in the global bond yields. The kind of fall in the global bond yields we have seen including the emerging markets has triggered a rally even in the Indian debt market.


The second factor was the liquidity play. The RBI announced in the policy that it will work to improve the liquidity into the system. Now we have seen continuous OMOs coming from the RBI. So that has improved the liquidity situation of late. Because of the forward maturity we have seen a lot of liquidity building up into the system. This liquidity is expected to remain soft in almost entire current quarter. So I think that is kind of fueling the rally because a lot of liquidity is now chasing the asset. As a result we are now seeing a chase in nationalised bank behaviour whereby we are seeing a lot of buying coming from the nationalised banks and which is kind of supporting the rally, adds Agrawal.


The third factor was the speculation that the new RBI governor probably will be more tilted in favour of growth. All these three factors together have resulted in some bit of rally.

What happens next from here is a slightly difficult to predict though the kind demand we have seen from nationalised banks supports the argument for another 10-15 bps further fall from the current levels. So we might see levels of around 7.10-7.15 on the 10-year bond yields but at the same time we have to be watchful of global developments because a couple of things such as rate cuts from Bank of England. With the limited scope, all these global central bankers might be having in their hand, probably it might not be possible for them to deliver on the kind of expectation that the market is building up. We have to be watchful about these things and we have to continuously track where the global bond yields are headed from here. That will ultimately decide if the sentiment remains in the domestic bond market .