Bonds Slide in India After Central Bank Holds Rates; Rupee Jumps

Updated on
  • ANZ sees some moderate pressure on bonds in the short term
  • Bond market disappointed as rate-cut hopes belied: Nomura

India’s sovereign bonds fell, reversing earlier gains, after the Reserve Bank of India kept interest rates unchanged as expected and lowered the proportion of deposits that lenders must invest in specified securities such as government notes. The rupee rallied the most since March.

The benchmark repurchase rate was left at 6 percent, with five on the six-member monetary policy committee voting for no change. The outcome was predicted by 31 of 32 economists in a Bloomberg survey, while one saw a cut to 5.75 percent. The central bank reduced the statutory-liquidity ratio by 50 basis points to 19.5 percent, effective Oct. 14. It also raised its inflation forecast and lowered the growth estimate for Asia’s third-largest economy.

“The tone of the statement is more hawkish and there should be some moderate pressure on bonds in the short term,” said Sanjay Mathur, chief economist for Southeast Asia and India at Australia & New Zealand Banking Group Ltd. in Singapore.

The yield on the benchmark 6.79 percent bonds due 2027 climbed six basis points to 6.70 percent, its highest close since May 19. It was around 6.62 percent just before the policy decision was announced. The rupee rallied 0.8 percent to 65.01 per dollar as the RBI said policy makers will review current rules on foreign investment in local debt.

The decision to hold interest rates at the lowest level since 2010 comes as inflation has picked up toward the RBI’s medium-term target of 4 percent. At the same time, growth in gross domestic product unexpectedly slowed in the April-June quarter and economists have cut estimates for the year to March.

Bond investors had developed some rate-cut expectations over the last few days and hence the “first reaction is negative,” said Vivek Rajpal, a Singapore-based rates strategist at Nomura Holdings Inc. From here on, markets will largely trade based on inflation and fiscal data, he said.

The RBI alluded to the fact that it can only be ascertained later as to whether the growth slowdown is temporary or long lasting, which suggests that the door for easing further out is not fully closed, said Mathur of ANZ.

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