Indian Rupee: Yields looking attractive after sell-off – DBS

DBS Group Research strategist Sherilyn Chew says hawkish Reserve Bank of India (RBI) minutes and volatility at the long end of the US Treasury market have pushed India rates higher. She sees 2-year India Government Bond yields as increasingly attractive after returning to levels seen before the RBI’s 5 June policy package. Chew also expects fading FCNR(B)-related liquidity support to weigh on the 5-year sector, creating scope for a steeper 2s5s IGB curve.

Front-end yields seen as attractive

"India rates have drifted higher over the past week from hawkish RBI minutes combined with spillovers from volatility in the US long end."

"The 2Y IGB yield has retraced back to levels last seen prior to the RBI's 5 June policy package."

"With a considerable amount of hawkish repricing already reflected in the front end, current levels appear increasingly attractive and could offer scope for yields to retrace lower should incoming data or policy communication shift in a more dovish direction."

"Meanwhile, as FCNR(B)-related liquidity effects gradually fade and money market rates normalise, the tailwinds that have supported 5Y IGB and OIS are likely to wane."

"Together, these point to scope for a steeper 2s5s IGB curve and a compression in the 2Y IGB-OIS spread."