The recent pessimism on the Indian government bond (IGB) market is overdone, as we expect stable policy rates, an improving Indian rupee (INR) outlook, and supportive supply dynamics in April and May, says Standard Chartered in its report.
On April 7, the benchmark 10Y IGB yield spiked beyond 9% for the first time since November 2013. 'We believe the risk-reward for a long IGB position is now favourable. We shift our IGB outlook to Positive from Neutral and recommend that real-money investors buy 5Y IGBs (7.28% 2019 IGB) at a yield of 8.95%, with a target of 8.65% and a stop-loss of 9.10%,' it opined.
'We think 1Y-5Y IGBs valuations are attractive. The current spread of the 5Y IGB yield (at 8.95%) over the repo rate (8%) is c.95bps, versus an average spread of c.20bps during the previous policy rate pause cycle from May-December 2012. We think the Reserve Bank of India (RBI) is unlikely to respond with a rate hike to transitory effects on CPI inflation, such as the El NiƱo effect on food prices, and will maintain stable policy rates. IGBs should gain as markets again price in stable policy rates.'
Further it said, 'Local market positioning is light and may improve in favour of longs. Our IGB market positioning indicator, SIGMA, was -2.93 in March (versus a three-year high of -0.48 in February 2013).'
Also, with the rationalisation of the IGB quota for FIIs (no incremental investment allowed in T-bills), future inflows will likely be into 1Y-5Y IGBs. FII sentiment towards IGBs has been more cautious than towards similar high-yielding emerging markets, possibly due to the ongoing general election. However, the latest opinion polls indicate a high chance of a stable National Democratic Alliance coalition government, and expect debt FII sentiment to improve, it added.
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