RBI Rate-Cut Bets Drive Indian Bond Yields to Lowest Since 2013

  • Goverment lowers small savings plans rates to aid transmission
  • Central bank `widely expected' to ease at April 5 meeting: DBS

Indian bonds rallied, pushing the 10-year yield to the lowest since July 2013, as the government’s decision to cut rates on small savings plans was seen paving the way for the central bank to further ease monetary policy.

The move by Prime Minister Narendra Modi seeks to address concerns that higher rates on government savings plans cannibalize deposits in the banking system and have prevented lenders from passing on last year’s 125-basis point reduction in the Reserve Bank of India’s benchmark repurchase rate. RBI Governor Raghuram Rajan, who next reviews rates on April 5, has been urging banks to accelerate transmission.

The yield on notes due January 2026 dropped two basis points to 7.50 percent in Mumbai, according to prices from the RBI’s trading system. That’s the lowest close for a benchmark 10-year note since July 2013. The yield has fallen 28 basis points in a rally that began with the government’s Feb. 29 budget decision to stick to its target of narrowing the fiscal deficit to a nine-year low.

“What’s driving the markets is expectations that lower savings rates will boost policy transmission and pave the way for further RBI easing,” said Ajay Manglunia, Mumbai-based head of fixed income at Edelweiss Financial Services Ltd. “The drop in bond yields points to a softer interest-rate regime in coming months.”

Rajan has kept the repo rate at 6.75 percent since September. Data last week that showed consumer inflation slowed to a four-month low in February has added to expectations of policy easing.

“The RBI is widely-expected to lower benchmark rates by 25 basis points on April 5, helped by easing inflation, soft production numbers and the government’s move to adhere to fiscal targets,” Radhika Rao, an economist at DBS Bank Ltd. in Singapore, wrote in a note.

The rate on five-year National Savings Certificates will be cut to 8.1 percent from 8.5 percent for the quarter starting April 1, while that on the similar-period Senior Citizens Savings Scheme will be reduced to 8.6 percent from 9.3 percent, according to a finance ministry statement on Friday. The moves follow the government’s pledge last month to align the returns on some small savings programs with those of sovereign securities.

The authorities seem to be “seriously doing” their part to clear impediments that may stand in the way of an easier monetary policy, Australia & New Zealand Banking Group Ltd. wrote in a report.

The rupee was little changed at 66.5350 a dollar after three straight weeks of gains, according to prices from local banks compiled by Bloomberg. It has rallied 2.8 percent this month, paring its 2016 decline to 0.6 percent, which is Asia’s worst performance.

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