The benchmark 10-year government bond yield slipped below the current repo rate of 8% on Tuesday, the first time in 18 months after the Reserve Bank of India left policy rates unchanged but said it would act early 2015.
The yield on the 10-year benchmark 8.40%, 2024 bond settled at a fresh 16-month low of 7.97%%. The yield has fallen nearly 50 basis points over the last two months. The last time the 10-year bond yield had slipped below the ruling repo rate was in June 2013.
“The base case for the market now is that 75-100 basis points of cut is expected over the next 15 months. The 10-year yield could see more downside, to 7.75% until March 2015,” said Ananth Narayan G, regional head – financial markets, South Asia at Standard Chartered Bank.
In the policy statement, RBI governor Raghuram Rajan said that if the current inflation momentum and changes in inflationary expectations persist, the central bank would act even outside the normal policy review schedule. The next bi-monthly policy review is slated on February 3.
The RBI has pegged the retail inflation to be at 6% by March 2015. Inflation had eased to 5.52% in October.
Deutsche Bank expects the RBI to cut the repo rate by 50 bps. “Since the RBI believes that its actions will have a powerful signaling impact on investment sentiments, the frist cut may well be 50 bps,” said economits Taimur Baig and Kaushik Das in a note.
“It is a dovish policy with an expectation that the rate cut will happen sooner than later. The 10-year bond yield could further ease to 7.85% by December end,” said NS Venkatesh, head of treasury at IDBI Bank.