Indian bond yields, swap rates ease after dovish comments from RBI chief
Indian government bond yields decreased early Tuesday. Overnight index swap rates also saw a reduction. Reserve Bank of India governor's dovish comments influenced the market. These comments eased concerns about interest rates. Traders are watching oil prices. Lower inflation could lead to another rate cut this financial year. The central bank will closely monitor incoming data.
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Indian government bond yields and overnight index swap rates both eased in early trading on Tuesday, as dovish commentary from the Reserve Bank of India governor in an interview eased concerns about the interest rate trajectory.The yield on the benchmark 10-year bond was at 6.2622% as of 9:45 a.m. IST, compared with its previous close of 6.2732%.The five-year 6.75% 2029 bond yield was at 5.9362% after ending at 5.9642%.Inflation below the central bank's current projections could open up policy space, India's central bank chief Sanjay Malhotra told Business Standard newspaper in an interview, adding that incoming data will be watched closely to strike "the right growth-inflation balance".The change in stance "does not imply an immediate reversal in the policy cycle", Malhotra said in the interview published on Tuesday.Earlier this month, the RBI cut its policy repo rate by a steeper-than-expected 50 basis points, but changed its stance to 'neutral' from 'accommodative', prompting analysts to forecast the end of the rate-cutting cycle."There is some buying support as the commentary has made the bulls active for now," a trader with a private bank said.Meanwhile, oil prices rose marginally, but the benchmark Brent crude contract stayed below $75 per barrel in Asian hours on Tuesday. Oil prices have been rising amid concerns about supply disruptions due to the conflict in the Middle East.India imports a bulk of its crude oil needs. Higher prices could affect the nation's inflation outlook . RATES Overnight index swap rates eased across the curve as the comments renewed hopes that consistently lower inflation readings could allow one more rate cut from the central bank in this financial year.The one-year OIS rate and the two-year OIS rate were down 3 basis points each to 5.49% and 5.48%. The most liquid five-year was 4 bps lower at 5.69%.
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So, at the bare minimum if you assume that 74 to 75 is allowed upstream benefits, but OMCs very clearly every Rs 2 to 3 retail margin decrease can have as much as a 30-35% impact on their EPS. So, it is a major risk on upside as well as downside. But at this point of time as Surana sir was saying given how fluid the situation is and given that the market fundamentals still support a bearish environment as far as crude prices is concerned, the key monitorable therefore really is how much does this conflict actually escalate, number one, and does the escalation actually get the Strait of Hormuz into play in terms of actual disruptions because if you remember India actually is impacted more than a lot of other countries on both the oil and gas front from the Strait of Hormuz. Almost 40% of our imports reportedly come through this route into India and almost 50% of our LNG imports also since the largest contract we have is with Qatar that also flows through this particular strait. So, both of them can actually see an impact. With three days in, four days in if we start to change estimates, we will have to change estimates every week at this point of time. Live Events So, we are in a wait and watch mode. We have put out sensitivities in a note that we released a couple of days ago in terms of what the impact could be, but as of now we would want to look at really how this conflict plays out before taking a definitive view on where the crude price estimates could be for the full year. Just wanted to have your take on what the implications could really be when it comes to the OMCs and especially your take on the valuations as well because the chatter that still persist in the markets and what these analysts have been highlighting is that yes, of course, the crude volatility is at play but if we look at the valuation, some of these stocks like HPCL , BPCL they are really trading cheap. So, since you also believe that this uncertainty should subside in some time from now, you are not changing any of your estimates or the base cases rather, this valuation picture still looking good? Probal Sen: Oh yes, absolutely. If we look at our estimates and obviously admittedly at this point of time those estimates can come under pressure. But at the current level all the three OMCs are trading between five to seven times one-year forward earnings. When I say one year forward, I mean, FY27 there or thereabouts, which is obviously a fairly attractive level specifically after the fall that they have seen in the last couple of sessions. Also, I would just like to add that while we are talking about the retail price impact and as Surana sir really said that the chances of a pushing through a price hike will probably be remote, therefore, the $6-7 hit if one has to take, that alone counts for around a three, three-and-a-half rupee hit on the current retail margins which are at about nine-and-a-half, ten rupees. So, even after taking that hit the margins at Rs 6 will still be well above historical levels and if prices do increase and product prices catch up, you could also see a short-term impact in terms of higher GRMs and some inventory gains as well, so which is basically what makes it very difficult to take a definitive view right now on what the earnings could look like and that is what makes us still a little bit optimistic that when the storm really settles down, as long as prices do not go completely out of whack at $70 to $75 or even at $75-77 range, we still see a lot of value in these stocks from a long-term perspective. What happens to refiners, your IOC , ONGC , Vedanta , etc? Probal Sen: So, whenever prices do rise in this environment given that it is geopolitical worries that are driving it, product prices may not actually rise in perfect correlation because the product demand on the ground is not really changing. Having said that, there will be some correction upwards and what we have been seeing in any case over the month of May is that GRM have actually recovered quite at a healthy pace. Singapore GRMs are anyways at $6.5 plus if we look at Q1 FY26 average till date. So, one would expect that on the GRM front you could actually see a little bit more of positive delta and at least for the first quarter given the sharp reaction that the prices have seen, you could probably have an inventory impact as well on the positive side at least in the refining business.
