India's benchmark bond yield may not fall much, OIS rates could -analysts

India's benchmark bond yield, which has slipped in the last few sessions, may have limited room to fall further as supply pressures persist, although overnight indexed swap (OIS) rates could see a steeper move lower, analysts said.

"Bond yields have fallen but are lagging the move in OIS by a large margin," said Vijay Sharma, senior executive vice president at PNB Gilts.

"I expect the benchmark bond yield to bottom around 7.30%. There is little scope for any further rally as there is continuous supply pressure, and we may stay closer to terminal repo rate of 6.50% for a longer period, so it does not make much sense to go below 7.25%-7.30% levels."

India's 7.26% 2032 bond yield dipped to 7.33% on Thursday, its lowest level in six weeks, as oil prices and U.S. yields continue to ease, while the local currency has also appreciated sharply in the last few days.

Sandeep Yadav, head of fixed income at DSP Investment Managers, said the benchmark bond yield could test 7.75% levels over the next three months.

On the supply front, India aims to borrow 4.60 trillion Indian rupees ($56.20 billion) through February and market participants expect borrowings to remain elevated next year, the last before general elections in 2024.

Meanwhile, the five-year OIS rate has plunged over the past few months to 6.65% currently, its lowest since Sept. 20, amid continued receiving interest from foreign banks.

That's well off its peak of 7.32% in June and its September-high of 7.11%, on fears of aggressive interest rate hikes.

The 10-year yield has eased 12 basis points (bps) this week, while the five-year swap rate has crashed by 28 bps.

OIS rates, which function according to rate expectations, saw heavy paying over the last few months as the United States and India embarked on an aggressive rate hike cycle to curb inflationary pressures.

"The five-year part of the OIS may continue to see traction, as Indian rates are likely to peak before the Fed rate, and top out at 6.50%," said Ritesh Bhusari, deputy general manager for treasury at South Indian Bank.

The Reserve Bank of India has hiked rates by 190 bps since May, to 5.90%, while the U.S. Federal Reserve has raised rates by 375 bps since March, to a 3.75%-4.00% band.

"The fact that recession fears are rising for the U.S. could be a major reason for continuous receiving interest in swaps," a trader with a private bank said.

Market participants said U.S. inflation data, due later in the day, and India inflation data on Monday will act as crucial triggers.