A further rally in Indian bonds may be on the cards as the Reserve Bank of India seems to have opened the door to further policy easing, possibly as early as August. For the first time in five meetings, the monetary policy panel’s decision was in line with market expectations – rates were kept steady and the policy stance maintained as neutral. More importantly, the RBI toned down its hawkish view, slashing its inflation forecasts in a tacit admission that retail prices have substantially undershot its projections.
This week also saw the first-ever dissent within the policy committee with Ravindra Dholakia, perceived as a dovish member, disagreeing with the decision to hold rates.
“We expect bonds to perform well on easing inflationary concerns, and expectations of a rate cut,” said Nagaraj Kulkarni, senior rates strategist at Standard Chartered Plc in Singapore. The bank is now expecting an August cut and maintains a 3-month positive outlook on Indian government bonds.
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Bond markets have reacted to the fall in Indian inflation. The yield on the nation’s benchmark 6.79 percent notes maturing in 2027 has dropped 20 basis points since it was introduced in May.
The RBI lowered its headline inflation projection for the first half of the fiscal year to a range of 2 percent to 3.5 percent, from 4.5 percent previously. For the second half, the projection was reduced to a range of 3.5 percent to 4.5 percent, from 5 percent.
Onshore swap rates are now pricing in a 50 percent chance of a rate cut in three months’ time compared to less than 20 percent previously, according to Vivek Rajpal, a rates strategist at Nomura Holdings Inc. in Singapore. The case for bond bulls is getting stronger, he wrote in a note dated June 8, suggesting investors further increase their long bond positions.
For its part, the central bank said it will remain watchful of incoming data. India will report May inflation and April industrial production data on Monday.