The long-duration bond market in India is facing headwinds as dwindling demand from financial institutions, coupled with rising fiscal concerns and limited potential for further rate cuts, are impacting sentiment among investors. Long-term investors, who typically favor government securities with maturities of 10 years or more for stable returns to match their future liabilities, are now reevaluating their positions.
Unfavorable factors, such as slowing tax revenues and weaker nominal GDP growth, have put pressure on government finances, leading to a rise in long-term bond yields. The benchmark 10-year bond yield has increased by 24 basis points since the Reserve Bank of India's surprise rate cut in June, signaling a shift in stance from "accommodative" to "neutral". The yield now stands nearly 100 basis points above the policy repo rate.
Economists point to weak direct tax receipts, concerns over higher debt supply, and investor positioning as key drivers behind the recent rise in yields. Despite challenges, the government is expected to meet its fiscal deficit target of 4.4% of GDP for the year. However, the mismatch between supply and demand for long-duration securities remains a significant concern.
Financial institutions like Axis Mutual Fund and ICICI Prudential Life are grappling with the imbalance in supply and demand, with the potential for further yield increases. Factors such as revised norms for banks and a tilt towards equity in the national pension scheme are further impacting appetite for long-duration bonds.
While some analysts believe that long-duration bonds may still hold value for long-term investors, near-term volatility remains a risk. The recent cut in the cash reserve ratio by the Reserve Bank of India has further clouded the outlook for the bond market in the second half of the year.
