Indian govt bond yield curve to steepen over medium term – DBS Bank's Vaidya

By Dharamraj Dhutia

MUMBAI (Reuters) - India's flat government bond yield curve will steepen over the medium term as elevated inflation falls back within the central bank's comfort zone in a few months and prompts short-end debt purchase, the treasury head of DBS Bank India said on Friday.

Separately, the benchmark 10-year bond yield, which is near its peak, is unlikely to sustain a breach of the crucial 7.25% mark in the near term, said Ashhish Vaidya, managing director and head of treasury and markets.

"The benchmark bond yield should remain in the 7.10%-7.25% range, and I do not expect it to break the upside much. Once we observe some disinflation, yields could ease and reach the lower end, leading to a rise in bull-steepening."

Inflation in India breached the upper end of the central bank's 2%-6% comfort band, rising 7.44% in July, sharply above the 4.87% rise in June, driven by a surge in vegetable and cereal prices.

The benchmark 7.26% 2033 bond yield was trading at 7.23% after hitting a more than four-month high of 7.26% on Thursday, tracking the relentless rise in U.S. peers and the jump in local prices.

"Inflation should stay elevated for the next couple of months and move back in a range over time. The Reserve Bank of India will try to hold off as long as it can and not act in haste, and will not look to tighten," Vaidya said.

Yields are hovering around the top end of the cycle and over the next six months the yield curve should start steepening, he said. The supply pressure could also steepen the curve, with more supply on the longer end, he added.

Vaidya expects rate cuts in India to start only in April-June, with a shallow easing cycle as compared to the United States.

"We may see around 50 to 75 basis points of cuts in the repo rate and nothing beyond that... The U.S. could witness cuts of 150-200 bps."

On the rupee front, however, Vaidya expects the currency to strengthen fundamentally in the medium term after facing some short-term decline.

"I expect the currency to trade in the 81.50 to 83 range in the near term," he said, adding the break on 83 may not hold for long.

The rupee was trading at 83.07 to the dollar, not far from its record low of 83.29 touched in October.

(Reporting by Dharamraj Dhutia; Editing by Swati Bhat and Eileen Soreng)