Goldman bets on Indian bond-swap spreads tightening

Goldman Sachs is recommending a spread trade in Indian debt markets that will help investors cash in on bullishness in the bond market while also betting that interest rate swaps are underpricing the central bank's hawkishness.

The trade they recommend involves buying 5-year bonds, betting on Indian bonds being included in benchmark global indexes, while concurrently taking a "paid" position in overnight indexed swaps.

The spread between the India 5-year bond and the 5-year OIS stands at 60 basis points, and the research house said it expects that to fall to zero if Indian bonds are included in the GBI-EM index.


An inclusion is expected in 2023, with an announcement likely in end-September or early October, Goldman Sachs said. An inclusion could lead to passive foreign inflows of $30 billion, the research house has estimated.

"If inclusion is announced in September, then pre-positioning by active funds is likely to be supportive for the bond market," Danny Suwanapruti, EM Asia Strategist at Goldman Sachs, wrote in a research note.

Meanwhile, Suwanapruti pointed out that rupee OIS rates have declined meaningfully since mid-June, and now price in an RBI policy stance that is less hawkish than Goldman's current terminal rate view of 6.75%.

The 5-year OIS has dropped to near 6.50% from around 7.30% in June.

"Our commodities team continue to flag meaningful upside to commodity prices, forecasting Brent prices to rise to USD130/bbl over the next six months, and the broader S&P GSCI commodity index to rally over 20% by year-end," Suwanapruti said.

This could lead to a higher inflation trajectory and a potentially more hawkish RBI than the market's current expectations, he said.

(Reporting by Nimesh Vora; Editing by Saumyadeb Chakrabarty)