The yield on the 10-year benchmark bond on Wednesday fell 6 basis points to close at 6.67% — marking a fall of over 10 bps in the last three sessions. On Tuesday, the Reserve Bank of India (RBI) decided to cut the repurchase rate by 25 basis points to 6.25%. Bond dealers snapped up paper as the possibility of another rate cut before the end of FY17 loomed large and lifted overall sentiment.
Traders believe the yield will fall further to 6.55%-6.60% before settling down since the market is now building up expectation for the next rate cut. Yields have been trending down since June this year – having fallen by approximately 80 basis points since June – and have fallen more than 20 bps since September 19.
Ananth Narayan, regional head of financial markets for ASEAN & South Asia of Standard Chartered Bank, believes there is room for yields to come further down. “That’s our base case given the real rate is moving down and the hard 4 % is being replaced with the mandate of an inflation target of 4% plus minus 2%,” Narayan said.
“Bond yields are definitely headed down. We could see the 10-year testing 6.55%-6.60% levels post the US elections, which is the next stop,” said Jayesh Mehta, MD and country treasurer, Bank of America.
Wednesday’s session saw the yield moving in a tight range of 6.674%-6.687% for most of the day after having initially dropped from the 6.74%-6.75% open levels.
Ashish Parthasarthy, Treasurer at HDFC Bank, said this was a continuation of Tuesday’s sentiment. “The market definitely seems to think there is room for another rate cut this fiscal,” he said. RBI executive director Michael Patra, who is also a member of the monetary policy committee, said, “With the risk free rate, i.e, the rate of interest on treasury bills at 6.5% and inflation expectations, best exemplified in the RBI’s own projections, at 5%, neutral rates are at 1.5%. But we need to take into account the global situation, wherein the neutral rates are declining. So, it could be about 1.2% or thereabouts.”