Local bond yields have dropped over the past few months as the Reserve Bank has continued easing monetary policy, but we think they will start rising again before long. Fiscal policy has been loosened substantially - the finance ministry puts the cost of its recent tax cuts at US$20bn (0.7% of GDP). With precious little to offset the measures, the overall fiscal deficit target will need to be relaxed later this year. And while the RBI is likely to cut interest rates further in the near term, we are firmly non-consensus in thinking the central bank will modestly hike rates by the end of next year. In all, we think the 10-year yield will jump to 7.5% by the end of 2020, from around 6.5% currently.
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