India bonds seen attracting buyers as 10-year yield nears 2022 levels

The 10-year yield has risen for 11 consecutive weeks, hitting 7.498% on Tuesday. Persistently high oil prices are stoking inflation concerns and fuelling bets on another Reserve Bank of India rate hike in December, potentially by 50 basis points.

The rupee's struggles are adding to those expectations, with investors weighing RBI chief Sanjay Malhotra's remarks linking price stability with financial stability and acknowledging that monetary policy cannot be entirely separated from the latter.

Yields on India's battered government bonds may be approaching territory that more investors consider a "buy", with that on the benchmark 10-year approaching 7.50%, a level not seen in four years.

For energy importer India, Brent crude oil near $115 a barrel and a struggling rupee remain key risks, but some Indian fixed-income investors reckon the bond selloff has reached a stage where the asset class offers a better risk-reward trade-off.

"We think the 7.50% level is an attractive entry point for the medium term," said Sachin Bajaj, chief investment officer at Axis Max Life Insurance.

He acknowledged that the yield could rise above 7.50% in the current cycle, putting its near-term trading range at 7.25%-7.75%.

The last time India's 10-year bond yielded more than 7.50% was in 2022 in the wake of an aggressive rate hiking cycle from the RBI.

VRC Reddy, treasury head at Karur Vysya Bank, said the bank would look to build positions once yields cross 7.50%, with further buying likely if they rise towards 7.60%.

Rahul Bhuskute, chief investment officer at Bharti AXA Life Insurance, echoed that view, saying yields of 7.50% and above were attractive and the insurer would look to build positions opportunistically in tranches.

While inflation risks are likely to persist over the next year, a large part of that is already reflected in prices, Bhuskute said.

India's swaps market is factoring in 125 basis points of policy rate hikes over the next 12 months, which some investors consider excessive.

The RBI's policy repo rate is at 5.50%, following a 25-basis-point hike earlier this month. Bhuskute expects a terminal repo rate of 6.00%-6.25%, below what the swap market is pricing in.

"We see fair value for the 10-year bond yield in the 7.15%-7.45% range over the next 6-12 months," Bhuskute added.