IDFC First Bank, Deutsche Bank See More India Rate Hikes; Short Bonds May Lag Long Bonds

According to Jin10, short-term Indian bonds are likely to underperform long-term bonds again as tighter liquidity and monetary conditions curb demand for interest-rate-sensitive debt. IDFC First Bank and Deutsche Bank forecast that the Reserve Bank of India may raise rates by up to 75 basis points in the coming months, after raising them by 25 basis points on October 7. The central bank is withdrawing liquidity from the banking system, and excess funds have fallen from their record high in early September. The yield spread between long- and short-term bonds narrowed to its lowest level since May earlier this month, then widened again as crude oil prices fell. VRC Reddy, treasury head at Karur Vysya Bank, said short-term bonds are more sensitive to immediate rate expectations and liquidity conditions. He said further rate hikes remain possible given current inflation trends and expects these bonds to continue underperforming.