Bonds in India Decline After Central Bank Cuts Rates as Expected

  • Benchmark repurchase rate cut by 25 basis points to 6 percent
  • Rupee extends gains to rise to strongest level since July 2015

Yes Bank's Rao Says RBI Rate Cut a Done Deal

Indian sovereign bonds fell after a central bank panel cut interest rates as expected while maintaining its neutral policy stance. The rupee extended gains.

The monetary policy committee led by Reserve Bank of India Governor Urjit Patel lowered the benchmark repurchase rate by 25 basis points to 6 percent, according to a central bank statement in Mumbai on Wednesday. The move was predicted by 41 of 57 economists surveyed by Bloomberg, while the rest forecast no change.

“The only surprise to me is no surprise in the policy,” said Vivek Rajpal, a Singapore-based rates strategist at Nomura Holdings Inc. “I continue to see value in sticking with front-end bonds, which should perform well. A big reaction in the longer end shouldn’t be expected as the outcome is broadly in line with expectation.”

The yield on government notes due May 2027 rose to as high as 6.48 percent before closing at 6.46 percent in Mumbai, two basis points higher for the day. The rupee ended 0.6 percent higher at 63.7025 per dollar. It touched 63.5975 intraday, the strongest level since July 2015.

This year’s first reduction in borrowing costs comes after gains in India’s consumer prices slowed to a record 1.54 percent in June and gross domestic product expanded by 6.1 percent in the January to March quarter, the slowest pace in two years. Wednesday’s rate cut is widely seen as the RBI’s last chance to stimulate growth as other major central banks look set to join the Federal Reserve in tightening monetary policy.

Read: RBI’s ‘No Surprise’ Policy Leaves Traders Wanting More

"Some of the upside risks to inflation have either reduced or not materialized," according to the central bank’s statement. "Consequently, some space has opened up for monetary policy accommodation, given the dynamics of the output gap."

Bond yields aren’t expected to see a “big decline” from here as the RBI’s statement doesn’t suggest there will be any more rate cuts in the near term, said Harihar Krishnamoorthy, Mumbai-based treasurer at the local unit of South African lender FirstRand Ltd.

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