INR Rates: DBS Expects A Steeper Yield Curve

DBS weighs in on the India rates outlook amid GSecs being maintained on the FTSE/Russell watch list and expected tighter liquidity conditions.

"Per FTSE Russell, feedback from international investors continue to highlight areas of further improvement, including the efficiency of FPI registration, as well as operational issues related to the settlement cycle, trade matching, and the tax clearance process. We do not expect GSec to sell off in response to FTSE Russell's decision, as inclusion expectations were quite low coming into March review.

1H'FY23/24 calendar for GSec issuances indicates an aggregate INR8.88tn of planned issuances. Compared to 1H and 2H'FY22/23 calendars, bond supply over the next 6 months will be larger in terms of both size and duration. In particular, proportion of issuances for the super-long tenors of 30Y and 40Y bonds are set at 16.1% and 17.6% respectively, notably heavier than the 12.3-15.6% in 1H and 2H'FY22/23 calendars. Given tighter liquidity conditions ahead relative to much of FY22/23, markets' ability to absorb the heavier supply will likely be tested, especially if index inclusion continues to be postponed and RBI doesn't restart OMO purchases. We expect supply-driven pressures to steepen GSec yield curve and widen GSec-OIS spreads over the course of the FY."