Bonds Drop in India as Rajan's Room to Ease Further Seen Limited

  • Central bank lowers key repurchase rate by 25 basis points
  • Investors booking profits after recent gains: DCB Bank

Indian bonds declined on speculation the central bank’s interest-rate cut Tuesday leaves little room for further easing.

The Reserve Bank of India reduced the benchmark repurchase rate to a five-year low of 6.5 percent from 6.75 percent in the fifth reduction since the start of 2015. Ten-year sovereign bonds climbed after the RBI released its statement, which also included measures to boost cash supply in the financial system, but gave away the gains as investors turned focus to the outlook for monetary policy, according to DCB Bank Ltd.

The yield on notes due January 2026 jumped five basis points, the most in two months, to 7.46 percent in Mumbai, according to prices from the RBI’s trading system. It fell to as low as 7.34 percent earlier. The yield ended at 7.41 percent on Monday, the lowest close for a benchmark 10-year security since June 2013, amid a bond rally fueled by bets of a rate cut and the government’s Feb. 29 budget decision to stick to its fiscal goals. The rupee dropped 0.4 percent to 66.4625 a dollar after rising as much as 0.2 percent earlier.

“There is concern about further easing due to the uncertainty around monsoons and its impact on inflation,” said Debendra Kumar Dash, a Mumbai-based trader at DCB Bank. “While the rate cut and the liquidity measures announced are positive in the medium-to-long term, bonds reacted to profit booking by some investors after the recent rally.”

Governor Raghuram Rajan’s scope for more easing is seen limited mainly due to the risk of a third straight year of below-average rainfall. The June-September monsoon waters more than half of India’s farmland.

“The stance of monetary policy will remain accommodative,” Rajan said in Tuesday’s statement. “The Reserve Bank will continue to watch macroeconomic and financial developments in the months ahead with a view to responding with further policy action as space opens up.”

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