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INDIA: Bond Curve: RBI Policy & Index Flows Likely Key 2025 Drivers

INDIA
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  • Steam came out of India's November inflation report, rising just +5.48%, down from October’s 1-year high of +6.21% and still significantly above the RBI target of 4%.
  • Data out earlier shows that GDP growth has slowed to +5.4%, the slowest in almost two years.
  • This week saw the announcement of Sanjay Malhotra as the new central bank Governor, succeeding Shaktikanta Das who has completed his term.
  • Markets have sought to assess Malhotra’s intentions at a time where a growing divide exists between the views from the government and the views from the central bank when it comes to interest rates.
  • At Das’s last meeting in charge interest rates remained on hold, with cuts to the Cash Deposit Ratio (the amount of cash banks must hold with the central bank).
  • Malhotra, like Das, is a career public servant and his appointment would be seen as maintaining cohesion between monetary and fiscal policies.
  • Market commentators have quickly moved to suggest that in his first meeting as Governor Malhotra will cut rates, and the bond market has priced in 45bps of cuts over a three-month time horizon yet with little known of Malhotra's personal views.
  • In terms of the 10YR-2YR curve, it has been very flat since COVID. India’s central bank has not openly held the affection for the steepness of the yield curve that the PBOC has.
  • Entry into the JPMorgan Bond index from June this year brings new dynamics for the Indian bond market, which should not be ignored.
  • If Malhotra sees a flat yield curve as policy, it creates a potential risk that arises from index inclusion – that of flight risk.
  • A flat curve gives no incentive to invest in longer dated securities, suggesting demand from foreign investors will target the more liquid front end.
  • As bonds mature foreign investors have the chance to re-assess their allocations more often than longer bonds.
  • This can create a more transient approach to allocating to Indian bonds and whilst their allocation in the JPMorgan index remains low, there is limited incentive to take duration bets.
  • Were Malhotra to set about a rate cutting cycle next year, perhaps deeper than anticipated should inflation allow, it could steepen the curve and bring about a more even dispersion of investors by maturity.
  • This could help develop over time a robust, longer term approach by global investors when allocating to Indian government bonds.   
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  • Steam came out of India's November inflation report, rising just +5.48%, down from October’s 1-year high of +6.21% and still significantly above the RBI target of 4%.
  • Data out earlier shows that GDP growth has slowed to +5.4%, the slowest in almost two years.
  • This week saw the announcement of Sanjay Malhotra as the new central bank Governor, succeeding Shaktikanta Das who has completed his term.
  • Markets have sought to assess Malhotra’s intentions at a time where a growing divide exists between the views from the government and the views from the central bank when it comes to interest rates.
  • At Das’s last meeting in charge interest rates remained on hold, with cuts to the Cash Deposit Ratio (the amount of cash banks must hold with the central bank).
  • Malhotra, like Das, is a career public servant and his appointment would be seen as maintaining cohesion between monetary and fiscal policies.
  • Market commentators have quickly moved to suggest that in his first meeting as Governor Malhotra will cut rates, and the bond market has priced in 45bps of cuts over a three-month time horizon yet with little known of Malhotra's personal views.
  • In terms of the 10YR-2YR curve, it has been very flat since COVID. India’s central bank has not openly held the affection for the steepness of the yield curve that the PBOC has.
  • Entry into the JPMorgan Bond index from June this year brings new dynamics for the Indian bond market, which should not be ignored.
  • If Malhotra sees a flat yield curve as policy, it creates a potential risk that arises from index inclusion – that of flight risk.
  • A flat curve gives no incentive to invest in longer dated securities, suggesting demand from foreign investors will target the more liquid front end.
  • As bonds mature foreign investors have the chance to re-assess their allocations more often than longer bonds.
  • This can create a more transient approach to allocating to Indian bonds and whilst their allocation in the JPMorgan index remains low, there is limited incentive to take duration bets.
  • Were Malhotra to set about a rate cutting cycle next year, perhaps deeper than anticipated should inflation allow, it could steepen the curve and bring about a more even dispersion of investors by maturity.
  • This could help develop over time a robust, longer term approach by global investors when allocating to Indian government bonds.