The Indian debt market has shown large movement as it witnessed fluctuations in bond yields driven by investor assumptions of policy actions from the Reserve Bank of India (RBI) and developments across the globe in the week of the market, from November 17 to 23, 2019. 

Bond Market Action Stoked by Anticipation of RBI Policy

India's bond markets were kept especially busy that week as investors were preoccupied about the outcome of the upcoming meeting of the MPC of the RBI. Interest rate trimming plans being anticipated by most market watchers were halted by high expectations regarding an impending or impending slow down in inflation and the forward trajectory of growth last week. All these have contributed to downwards movement of the yields across major government securities. 

The yield on the 10-year benchmark government bond, the 6.79% 2034 bond, slipped down from 6.75% at the week's start and closed at 6.68% on Thursday marking the lows last seen in February 2022. Investors felt this decline indicated the positive sentiment among them about the likely policy view of the RBI. The bond market has also recorded a higher volume of trade compared to the total turnover of business that saw an increase significantly against the previous week.

Corporate Bonds Reflect Cautious Optimism

Corporate bonds trailed by the government bonds followed the same leads in downsizing yield trends. Speculation regarding possible RBI liquidity measures supplemented the general dovishness surrounding rates with mixed factors articulating positive sentiments in the corporate bond markets. Many institutional investors grabbed their opportunity to raise or fortify portfolios with reduced yields.

Market analysts commented that while there has been concern about global inflation and geopolitical risks, Indian corporate bonds are more attractive given the opportunity for an easing in monetary policy. The increase in trading volume in the corporate bond market translates into healthy demand for higher-rated corporate debt.

Liquidity Conditions Staying Sated

Bank liquidity was well above normal for the third week running since the start of November. According to RBI, there was a surplus of more than ?1 trillion in the banking system on a day-to-day basis. This was mainly caused by a fall in the requirement of funds from commercial banks as well as the effect of RBI intervention in the currency markets for the rupee's volatility management.

With an abundance of excess liquidity, bond yields have stayed subdued, as investors expect that the RBI may inject liquidity when there are signs that the economy is slowing further.

Credit Spreads Narrow Under Surplus Liquidity

This surplus liquidity in the system has also resulted in narrower credit spreads across various maturities of bonds. Corporate bonds, particularly the higher-rated ones, experienced a reduced spread compared to government bonds, suggesting that investors are becoming more willing to take risks in anticipation of a fairly accommodative monetary policy by the RBI.

Market participants were wary that a strong geopolitical or global economic shock could turn the tide in favor of any positive sentiment on the domestic bond market, particularly lower-rated corporate bonds. The environment for the global debt market is highly turbulent, with interest rates in developed economies rising and ever-present worries about global inflation. 

The forex market pressure is gripping sentiment in the debt market. 

The Indian rupee further declined against the US dollar during the third week of November, with a ripple effect on the debt markets. A weakening rupee increases costs of foreign debt servicing, adding some cautionary elements well into foreign investment flows into Indian bonds. Nevertheless, the overall demand for government securities and high-rated corporate bonds did not get affected much, which indicates that investor confidence in the Indian economy is still strong. 

Conclusion.

 The third week of November kept the positive trend in India's debt markets rolling due to high liquidity, hopes of an accommodating monetary policy, and narrowing credit spreads. Current risks include continued pressure from a weaker rupee and general ambiguities regarding the global environment. As market participants brace for the RBI's policy decision, the fate of India's debt markets would be sealed by how adeptly the central bank tackles the economic challenges at home and abroad.