Bond Bulls Say Cheers Again as RBI Seen Ending Hawkish Tone

  • Markets are even starting to expect another rate cut: SBI
  • GST, normal monsoon will leave RBI without hawkish case: PNB

Just as Indian bond bulls were about to leave the party, it looks like they may be staying a bit longer as record-low inflation fuels speculation the central bank may ditch its hawkish tone next week.

Bullish sentiment is resurfacing in the debt market after the economy grew at its slowest pace in two years and price pressures eased to an all-time low 2.99 percent. Food prices are set to extend declines on expectations for a normal monsoon season and the start of a new and lower goods-and-services tax on numerous edible products.

Debt traders were caught off-guard in April when minutes of the Reserve Bank of India’s policy meeting took on an unexpectedly hawkish slant. They flagged concerns about inflation, while one panel member even called for a preemptive rate increase. RBI Governor Urjit Patel reinforced the bias a week later, saying a phase of rising rates is setting in for emerging markets. 

“Sentiment is becoming more sanguine now after it turned bearish following the RBI minutes,” said Vijay Sharma, executive vice-president for fixed income at PNB Gilts Ltd. in New Delhi. “With the new dynamics of inflation emerging, including the GST and expectation of a normal monsoon, the view taking shape in the markets is that the RBI doesn’t have a case to remain hawkish.’’

The yield on the government’s newly-issued 10-year benchmark bonds may fall to around 6.50 percent if the RBI acknowledges faster-than-expected disinflation and reveals a benign CPI outlook, Sharma said. The 10-year yield dropped one basis point to 6.61 percent Friday, the lowest level for a benchmark bond since April 3. A Bloomberg survey predicts the yield may climb to 6.78 percent by June 30.

Slower Inflation

Consumer price inflation may fall by 2 percent by the end of the fiscal year in March due to improved compliance after the introduction of GST, Revenue Secretary Hasmukh Adhia said in an interview with the Business Standard newspaper last week. GST may shave 10 to 50 basis points off India’s CPI, according to HSBC Holdings Plc.

“The market is expecting a reset in RBI’s monetary policy tone going forward,” said Rajeev Radhakrishnan, Mumbai-based head of fixed income at SBI Funds Management Pvt., a unit of India’s largest lender. Softer inflation, the forecast of normal monsoon rains, ample banking liquidity and positive foreign inflows are giving traders reasons to expect the RBI to tone down its hawkish bias and possibly even cut the policy rate one more time, he said.

The 10-year yield has declined by 12 basis points since the release of the record-low inflation data. The yield jumped to an eight-month high of 6.99 percent in May. 

Optimism in the bond market is shared by swap traders. One-year interest-rate swaps fell to 6.38 percent on June 2, the lowest since Feb. 7, suggesting investors are starting to price in a less-hawkish RBI. Swaps extended their decline after economic growth slowed to 6.1 percent last quarter, adding to speculation the RBI may dial down its hawkish rhetoric.

Read: Slowest Growth in Two Years Confronts Hawkish India Central Bank

“When the writing on the wall is clear, that inflation is not going to be the problem they had anticipated, or the anticipated risk from the GST is not turning out to be a risk, I don’t think they have a room to be hawkish,’’ said Sharma of PNB Gilts.

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