The yield on the 10-year benchmark is expected to fall to 6.60% by the end of March and could fall further to 6.50%, Akhil Mittal, senior fund manager-debt at Tata Asset Management, told FE.
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On the global front, he said, the policies by new US president Donald Trump are likely to set a new trajectory as the market is going to see how much volatility it adds to the currency market and how strict Trump would be on imposing tariffs. Amid global uncertainties, higher probability of the Reserve Bank of India (RBI) cutting rates in February and the end of supply of the government bonds in the same month are going to help in easing of yields, Mittal added.
Another factor which makes the case stronger for a rate cut is the slowdown in economic growth. Though the growth figures for Q2 (July-September) are seen as an outlier, the government and the central bank are maintaining an upwards push in Q3 (October-December) growth on account of government spending.
“If Q3 growth doesn’t pick up, you will have two consecutive quarters of very low growth and inflation falling in pace. That would probably lead to a steeper rate cut cycle,” Mittal said. He added that in an unexpected scenario, if RBI does not cut rates in February, it may announce additional measures to infuse liquidity in the banking system. Also, the chances of RBI conducting open market operations are very high as it leads to an increase in circulation of high-powered money.
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The US cut rates in September and the markets assumed a similar turn in policies by all major central banks. Hence, the market added duration bonds. But high inflation prints and tight liquidity conditions did not allow RBI to ease rates. So, the market cut down on the duration in November, Mittal said.
Going forward, easing in the system liquidity and cooling inflation will likely see the markets again moving towards a longer duration, he added.
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