Bond prices in India rise in advance of the Federal Reserve's policy announcement
The Indian bond market witnessed a notable shift this week, with the 10-year bond yield in India declining to 6.4726%, a decrease from Tuesday's closing yield of 6.4925%. This downward trajectory is anticipated to persist, with HSBC forecasting a drop to 6.00% by the end of 2025.
The strengthening rupee, improved prospects of a trade agreement with the U.S., and a dovish FOMC commentary are buoying sentiment in the stock market today. A trader at a state-run bank remarked that these factors are contributing to the positive outlook.
The rupee concluded at 87.8150, appreciating 0.27% on the day, marking its most significant one-day gain since August 19. This rupee appreciation is also bolstering confidence in the domestic debt market.
Pranjul Bhandari, chief India strategist at HSBC, believes there is a skewed risk towards further monetary easing in India due to tariff-related uncertainty and a benign inflation outlook. This view is shared by many market participants, who have already priced in a 25 basis point cut, with a slim chance of 50 bps. The odds of an aggregate 75 bps of rate cuts through December stand at 74%, according to the CME FedWatch Tool.
The overnight index swaps in India dipped on anticipation of a dovish Fed policy decision. This dip signifies the market's expectation that the revival of the Fed's easing cycle could make room for the Reserve Bank of India to resume policy easing.
Traders bought Indian government bonds in anticipation of a dovish Federal Reserve policy outcome. This buying activity was also observed in U.S. Treasuries, with the yield on the U.S. 10-year bond remaining at 4.01%.
The two-year OIS rate in India is now at 5.43%, while the five-year OIS rate dropped nearly 2 bps to 5.6850%.
It is noteworthy that bond yields move inversely to prices. This means that as the price of a bond increases, its yield decreases, and vice versa. The current downward trend in bond yields suggests a potential increase in bond prices.
The name of the HSBC chief India strategist predicting this trend is Mohit Kapoor. His prediction aligns with the general sentiment in the market, which is optimistic about the future of the Indian bond market.
The U.S. Fed's policy decision is due after market hours. The outcome of this decision could further influence the direction of the Indian bond market. Regardless, the current trend towards lower bond yields and a strengthening rupee suggests a positive outlook for the near future.
