MUMBAI: Shorter-maturity Indian bonds are poised to extend losses amid growing expectations the central bank will accelerate its policy normalisation as the economic revival gains traction.

       Rates on notes with maturities of up to two years climbed in recent weeks as the central bank expanded its efforts to remove excess liquidity from the banking system, with the one-year bill yield rising to the highest since April 2020.

       The benchmark 10-year bond yield, on the other hand, has seen smaller gains.

       Money-market rates and yields on shorter-maturity debt are likely to rise further as traders expect the Reserve Bank of India (RBI) to augment its liquidity operations with a possible increase in the reverse repo – the rate it uses to drain funds – in the December policy review.

       In contrast, long-end bonds may be cushioned by expectations of lower debt supply and the possible inclusion of Indian bonds in global indexes.

       “The front-end (up to two years) yields should face the maximum impact of the rate hikes and yields should move higher in this segment,” said Pankaj Pathak, fixed-income fund manager at Quantum Asset Management Co.

       After draining liquidity, “the next logical step in the direction of policy normalisation is a hike in the reverse repo rate.”

       The spread between the one-year Treasury bill and the benchmark 10-year bond stood at 220 basis points on Friday, after hitting a decade high in September due to record excess liquidity. The 91-day yield has climbed by 23 basis points since end-August.

       Shorter-maturity bonds are facing the brunt as they are more susceptible to RBI’s operations aimed at reducing system liquidity, while longer-end bonds are relatively less impacted on optimism faster economic growth will boost revenues and reduce bond supply.

       Strategists also see benchmark repo rate to be raised only in the next fiscal year.

       Traders are awaiting the central bank’s next policy meeting on Dec 8. Data this week is likely to show that the economy expanded 8.2% in the September quarter from a year ago, after a 20.1% jump in the previous quarter.

       Swap markets are already pricing in 40 basis points of reverse repo hike in December, according to ICICI Securities Primary Dealership Ltd.

       While RBI governor Shaktikanta Das has repeatedly said that he will keep policy accommodative until growth gets back on a firm footing, economic data seem to be cementing the case for a gradual unwinding of easy monetary policy, in line with the global trend. — Bloomberg