Mumbai: It’s taken less than a week for investor sentiment on Indian sovereign debt to shift from bearish to bullish.

The Reserve Bank of India late Monday allowed banks to spread their bond-trading losses, incurred in the December 2017 and March 2018 quarters, equally over as long as four quarters. The reprieve came days after the government surprised traders by reducing the fiscal first-half borrowing, a move that spurred the first monthly advance since July.

“The short-term outlook for bonds is extremely bullish," said Sandeep Bagla, associate director at Trust Capital Services India Pvt. in Mumbai. “The RBI’s easing of provisioning norms further boost the positive sentiment."

The benchmark 10-year yield may decline by as much as 10 basis points on Tuesday when traders return to their desks after a five-day break, said Dhawal Dalal, chief investment officer for debt at Edelweiss Asset Management Ltd. The move will help bring state-run lenders—the biggest holders of debt—back to the market, he said.

Government banks were staring at a potential mark-to-market loss of Rs20,000 crore ($3 billion) in the March quarter, three times more than in the period to December, according to a Credit Suisse Group AG report last month. Hit by the erosion, lenders have remained on the sidelines, contributing to the deepest rout in two decades in the nation’s sovereign bonds.

Three other factors are driving the shift in sentiment:

Yield on the 10-year bonds slid 33 basis points in March to end at 7.4%. Indian financial markets were closed Thursday, Friday and Monday.

“I’m not expecting the RBI to be as hawkish as they were in the previous policy meeting," said Harish Agarwal, a fixed-income trader at FirstRand in Mumbai. “The rally has more legs". Bloomberg

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