There's growing consensus among traders that the RBI will have to
start draining excess cash from the banking system, as abundant liquidity
crashed short-term rates and threatened to stoke inflation
India’s sovereign
bond investors are converging on a trade idea for 2021. They’re betting
that short-term yields would rebound as the central bank soaks up excess cash
on signs of an economic recovery.
RBL
Bank Ltd. and Quantum Asset Management Ltd. are among those forecasting
that liquidity tightening by the Reserve Bank of India will lead short-end
rates to rise faster than the long-end -- bear-flattening the yield curve.
“Short-end rates,
of up to three years maturity, are currently priced aggressively due to excess
liquidity and thus carry maximum risk of a reversal,” said Pankaj Pathak,
fixed-income fund manager at Quantum Asset Management Ltd. in Mumbai. “The
longer segment may continue to get RBI’s support from open market operation
purchases and operation twists.”
There’s growing
consensus among traders that the RBI will have to start draining excess cash
from the banking system, as abundant liquidity crashed short-term rates and
threatened to stoke inflation. Nomura Inc. expects the central bank to start
doing so as early as the second quarter of 2021.
The spread between
the 10-year yield and the secured overnight rates may gradually narrow,
according to Suyash Choudhary, head of fixed income at IDFC Asset Management
Ltd. However, it may stay higher than the average seen in the past few years
with with monetary policy remaining accommodative and bond supply staying high,
he said.
Even as the RBI
expects the nation to exit a recession in current quarter, economic risks
remain as India is still the second-most affected nation by the coronavirus
after the U.S.
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