Indian bond yields could rise sharply from April, OMOs unlikely – Barclays' Agrawal
Indian government bond yields could start climbing from April, with the benchmark 10-year bond yield potentially hitting a high of 7.75% in the absence of open market bond purchases by the central bank, a senior strategist at Barclays said on Wednesday.
The benchmark 10-year yield was likely to move in the 7.25%-7.50% range in January-March and then rise into the 7.50%-7.75% range in April-June, as fresh supply starts, said Ashish Agrawal, head of FX and EM macro strategy research, Asia, Barclays.
"Gross issuances will rise, and the not-so-dovish central bank will keep people less excited about Indian government bonds."
The 10-year bond yield (IN072632G=CC) was little changed on the day at 7.32%, but down 30 basis points from its June high.
Agrawal expects the government to gross borrow a record 16.80 trillion rupees ($205.32 billion), with net borrowing standing at 12.40 trillion rupees. He forecasts a fiscal deficit target of 5.8% of the gross domestic product for the next financial year.
"For the near-term, the 10-year yield is rich, and it can cheapen as the supply picks up," he added.
The Barclays strategist expects the Reserve Bank of India (RBI) to hike the repo rate by another 25 basis points to 6.50% next month followed by a prolonged pause but does not see the central bank turning dovish in the near term.
"RBI remains focused on inflation, and they have started talking about headline inflation of 4%, and sticky core inflation, which means that they are unlikely to give any dovish signal anytime soon," he added.
The RBI hiked the repo rate by 225 basis points to 6.25% in 2022, to fight inflationary pressures. The headline reading eased for the second month in December but stayed close to the upper tolerance limit of the central bank's target.
Agrawal further said, a higher state debt supply in the next financial year, and a lack of central bank support in the form of open market purchases will also push yields higher.
On the rupee, Agrawal said the currency is likely to continue its recent appreciating streak as dollar weakness is expected to persist while the Indian economy's fundamentals look strong.
The Indian rupee 
USDINR was at 81.63 to the dollar on Wednesday, up 1.2% in January, and the strategist expects the currency to rise to 80 levels by end-2023.
"For India, the worst for current account deficit is behind us, and it will narrow going further," Agrawal said.
"Equity flow picture has dampened a bit right now, but generally speaking of growth risk in developed markets space, India will stand out as relative out-performer where growth is relatively resilient."
($1 = 81.8225 Indian rupees)