India bonds are a buy for Citi on diverging rates policy with US

Economic Times

28-05-2025

Citigroup anticipates a continued rally in Indian bonds, driven by deeper interest rate cuts by the Reserve Bank of India, potentially reaching 5%. This diverges from the US Federal Reserve's stance, weakening the traditional link between Indian bonds and US Treasuries. Aberdeen Investments echoes this view, predicting further rate cuts amid easing inflation and potentially lower oil prices.
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The rally in Indian bonds is set to extend as the nation embarks on deeper interest-rate cuts, diverging from the US, according to Citigroup Inc.The Reserve Bank of India may cut interest rates by 100 basis points to a three-year low of 5% after two consecutive reductions this year, said Rohit Garg, head of foreign-exchange and rates strategy Asia ex-Japan. Aberdeen Investments sees a similar trend.That's in contrast to the Federal Reserve's pause on rates and outlook that it's not in a hurry to slash further — and the divergence means investors' outlook for Indian bonds in terms of their spread over US Treasuries is changing, Garg said. For years, local bonds have largely moved in tandem with swings in Treasuries, with the returns over the world's safest debt serving as a key barometer for overseas investors.That link seems to be weakening now, as Indian bonds rallied amid a selloff in their US counterparts, sending the yield gap to a 20-year low.'We are in a bit of a structural change wherein the need for us to actually see Indian bonds as a spread to US Treasuries should be declining because monetary policies are diverging,' said Garg.The yields on 10-year bond has declined by more than 30 basis points since the start of the fiscal year on April 1. In contrast, that on similar-maturity US note has climbed by 27 points as President Donald Trump's tariffs fueled inflation worries.The divergence is likely to sustain, 'which means that we should be looking at Indian bonds from the context of where monetary policy in India is, where can it go,' said Garg. He expects the 10-year yield to fall to 6% in the next three months, from 6.25% on Tuesday.Aberdeen Investments is also predicting 100 basis points of rate cuts in the current cycle on easing inflation. That may push yields down to 5.5% 'should it coincide with faltering global growth and lower oil prices,' said Kenneth Akintewe, head of Asia sovereign debt at Aberdeen.Garg didn't give a specific time frame for his rate call, but by one comparison, economists surveyed by Bloomberg see India's repurchase rate falling to an average of 5.40% by March 2026. Citi 's analysts including Garg had predicted an end to peak dollar strength against Asian currencies in early March. Since then, the dollar has weakened sharply.RBI and 'all Asian central banks are looking at monetary policies that are a lot more dominated by their own domestic needs as compared to trying to preserve external stability,' Singapore-based Garg said.