Indian Bond Yields May Dip to 6.75-7% by 2027, Rupee to Gain: SBI Research
SBI Research predicts Indian 10-year bond yields could drop to 6.75-7% by 2027, while the rupee may appreciate amid shifting US Treasury trends.
In a comprehensive analysis of the financial landscape, SBI Research has projected that Indian 10-year bond yields could ease to a range of 6.75% to 7% by March 2027. The report further suggests that the Indian rupee is likely to maintain an appreciating bias, driven by expectations of a weakening US dollar and a moderation in US Treasury yields.
The US Connection: Treasury Yields and Fiscal Pressures
The trajectory of Indian yields is closely tied to the US market. According to the latest Ecowrap report, SBI Research anticipates that US Treasury yields will most likely settle around 4.75%. However, the path to this level is fraught with challenges due to significant imbalances between the supply of securities and investor demand.
The research firm highlights a staggering excess supply of USD 304 billion in the US Treasury market, which aligns with a fiscal deficit of 6.15% of GDP. To put this in perspective, the mismatch in 2015 was only USD 140 billion when the fiscal deficit was 2.5% of GDP.
To bring the 10-year Treasury yield down to 4.75%, SBI Research estimates that the US government would need to slash its borrowing or expenditure by approximately USD 100-120 billion. A more aggressive reduction of USD 200 billion could potentially push yields even lower, toward 4.5%.
Short-Term Volatility and Indian Market Dynamics
While the long-term outlook is positive, the report warns of immediate turbulence. Short-term volatility could potentially spike Indian bond yields as high as 7.6%. Similarly, the US 10-year Treasury yield, currently around 4.9%, could temporarily climb to between 5.25% and 5.35%.
In the domestic sphere, the government securities market in India is facing an estimated excess supply of about Rs 1.52 lakh crore. However, the report notes that the government has already taken proactive steps to mitigate this. Through strategic bond switches and buybacks, the gross borrowing requirement has been reduced by Rs 1.23 lakh crore, providing a necessary cushion for bond yields.
The Yield Spread and RBI's Role
Currently, the spread between Indian and US 10-year government bond yields is approximately 250 basis points, with Indian yields at 7.43% and US yields at 4.93%. SBI Research points out that a spread of 200-300 basis points is historically the most plausible range.
Interestingly, the report suggests that even if the Reserve Bank of India (RBI) decides to increase the repo rate by 50 basis points to reach 6%, the Indian bond yields are still expected to remain within the projected 6.75-7% window by March 2027.
Risks to the 'Magnificent Seven'
The analysis also extends its gaze to the global tech sector. SBI Research warns that rising debt among major US technology companies poses a significant risk. If yields remain elevated, the "Magnificent Seven" tech giants could face massive market capitalisation losses, estimated between USD 1.67 trillion and USD 2 trillion.