DBS Group Research economist Sherilyn Chew analyzed the performance of Indian government bonds following the Reserve Bank of India's (RBI) June 5 capital flow liberalisation. According to Chew, the 2-year Indian Government Bond (IGB) yield has compressed by 30 basis points since the announcement, a move primarily attributed to a repricing of RBI policy expectations [1]. She notes that the scope for further decline in 2-year yields appears more limited at this stage [1].
Chew highlights that while RBI rhetoric indicates a near-term rate hike is unlikely, risks remain tilted to the upside, particularly due to food inflation [1]. In contrast to the sharp rally at the front end, the 10-year IGB rally is described as more measured and supported by ongoing foreign inflows, suggesting that the long end of the curve may have further room for yield compression [1].
The divergence between the front-end and long-end movements points to the potential for modest curve flattening, driven by structural demand and fading expectations of rate hikes [1]. No specific market reactions or analyst opinions beyond those of Sherilyn Chew are mentioned in the article [1].
CONCLUSION
The Indian government bond market has experienced a notable shift, with short-term yields compressing sharply and long-term yields supported by foreign inflows. While further front-end yield declines may be limited, structural demand could drive modest curve flattening, with risks to the outlook stemming from food inflation.