Short-duration bonds rally for second day after RBI’s ECB-like move

Sovereign Indian bonds, especially the short-term notes, are likely to offer higher returns versus interest-rate swaps as wagers for further cuts in interest rates dwindle, according to Barclays Bank Plc.

Short-duration bonds rose for a second day after the Reserve Bank of India on Thursday said it will lend 1 trillion rupees ($14 billion) in one- and three-year money to banks at the policy rate. Rate swaps are set to underperform as the RBI’s inflation outlook has pushed back expectations of easing to the second half of the year starting April 1, the lender said.

“We expect bonds to outperform OIS, more so after the long-term repos introduction,” Ashish Agrawal, head of FX and EM macro strategy research at Barclays, wrote in a note. But swaps will lag behind “with little expected” by way of rate cuts, given the RBI expects retail inflation to fall below its medium-term target of 4% only in the third quarter of the new fiscal year, he said.

The yield on four-year debt declined eight basis points at 11 a.m. in Mumbai, extending Thursday’s 17-basis point drop. Yields on three-year notes have fallen 26 basis points over two days to 5.85%, with Barclays expecting them to fall further to 5.75%. One-year rate swaps slid 6 basis points Friday to 5.07%.

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