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Business News/ Markets / Stock Markets/  Bond yields may fall to 6.50% by Q4FY25, says analyst. Here’s what fixed income market investors should do
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Bond yields may fall to 6.50% by Q4FY25, says analyst. Here’s what fixed income market investors should do

The Indian stock market benchmark indices Sensex and Nifty 50 hit record highs, rupee appreciated, while bonds yields dropped as the positive surprise of higher than expected RBI dividend enthused the share markets.

Rupee continued to appreciate as Brent crude remained stable and FPI flows into the bond market accelerated. The inflows into debt stand at $5.73 billion in 2024 so far. (Photo: iStock)Premium
Rupee continued to appreciate as Brent crude remained stable and FPI flows into the bond market accelerated. The inflows into debt stand at $5.73 billion in 2024 so far. (Photo: iStock)

Indian government bond yields stayed below the 7% mark on Tuesday as underlying sentiment remained supportive, with analysts expecting a further easing going ahead. The benchmark 10-year yield was at 6.9737%, following its previous close of 6.9780%.

Indian bond markets got a boost after the Reserve Bank of India’s (RBI) board last week approved the transfer of a whopping 2.11 lakh crore dividend to the government for the financial year 2023-2024, which was more than double the market had expected.

A higher dividend amount provides a great deal of flexibility to the central government on the fiscal side and this positive surprise enthused all the markets with lower bond yields, rupee appreciating and the stock markets hitting new highs.

Also Read: RBI dividend boost to help in improving budget math

“The maximum impact of the higher dividend was seen at the longer end of the curve with bond markets feeling optimistic about a cut in government borrowing when the full Budget is presented in July," said Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund.

Yields at the shorter end of the curve also came down as a result of lower borrowing in T-bills as announced last week to reduce the government surplus which may go up to 6 lakh crore after the transfer of the RBI dividend. The 3 month T-bill yield has come down to 6.85% from 6.99% earlier and 3 month bank CD yields have also come down by 10-15 bps, he added.

As core inflation hits an all-time low of 3.20% and the fiscal leeway available to the government with the higher than expected dividend, he believes bond yields will continue to drift lower with the favourable demand supply dynamics providing the necessary tailwind.

Also Read: Goldman Sachs raises India’s GDP growth forecast to 6.7% for 2024; expects RBI repo rate cut in December quarter

“We continue to believe that the global monetary tightening cycle has effectively ended and the bar of further rate hikes in the US remains high despite the continuous hawkish posturing by some FOMC members. The scope for rate cuts in India is on account of high real positive rates and the need to encourage private investment and there is a fair probability of rate cuts in the second half of FY25 though any rate cuts in India will follow rate cuts in advanced economies and will not precede them," Pal said.

He expects the benchmark 10 year bond yield to go towards 6.50% by Q4 of FY25.

Meanwhile, rupee continued to appreciate as Brent crude remained stable and FPI flows into the bond market accelerated. The inflows into debt stand at $5.73 billion in 2024 so far.

Also Read: FPIs continue to dump financials, IT, FMCG shares in May. What lies ahead?

What should fixed income market investors do?

Bond yields tend to move in advance of rate action and investors can look to increase allocation to Fixed Income at every uptick in yields.

Investors with medium to long term investment horizons can consider Dynamic Bond Funds having duration of 6-7 years with predominant sovereign holdings as they offer a better risk-reward currently, Pal said.

Investors having an Investment horizon of 6-12 months can look at Money Market Funds as yields are attractive in the 1 year segment of the curve also.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 28 May 2024, 01:35 PM IST
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