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Indian Bond Yield Curve May Invert As Rate Hikes Near End: Axis Bank Treasury Head

Mumbai: The Indian government bond yield curve could invert, with the benchmark 10-year bond yield easing below those of shorter tenor securities, as the central bank’s rate hike cycle nears its end, the treasury head of private lender Axis Bank said today.
“When the market gets the sense that we are near the top of the rate hike cycle, there is a possibility of some sort of inversion of the yield curve,” said Neeraj Gambhir, group executive and head – treasury, markets and wholesale banking products at Axis Bank.

“We could see the 10-year bond yields go a little lower than the short-term two- to five-year yields. However, till the time we are in a hiking cycle, the flatness will persist.”

The 10-year bond yield was at 7.39% on Wednesday, while the five-year yield was at 7.32%. The three-year yield ended at 7.33% on Monday.

The Reserve Bank of India has raised the repo rate by 190 basis points (bps) since May, to 5.90% currently, and Gambhir expects another 60 bps worth of hikes over the next few months.

“As a base case, the December rate decision would be a 35-bps hike, followed by another 25 bps in February.”

Gambhir expects the benchmark bond yield to trade in a narrow 7.30%-7.60% range over the next few months, with the top end threatened only by sharp, unexpected spikes in inflation or crude oil prices.

He also expects the government to tone down its borrowing next year, given its “quite robust” revenue this year.

“I do not expect any material increase in the size of government borrowings. I think we should continue to see some level of fiscal consolidation, though not at a very rapid pace.”


Gambhir expects the rupee to continue to decline gradually but sees a very remote chance of interest rates being used as a tool to cap the fall.

“If the situation warrants, then maybe some administrative tools can also be deployed, which could work towards encouraging inflows and discouraging outflows,” he said.

“The use of interest rate as a defence should be the last resort as it has very negative implications for economic activity. Given the current circumstances, I do not think we are anywhere close to that situation.”

The Indian rupee was last trading at 81.55 per dollar, having slid 9.7% so far this year.

Gambhir said India’s large current account gap and the moves in Asian currencies will continue to determine the rupee’s fate.