The 10-year benchmark yield fell five basis points on Friday to close at 6.48% after a disappointing growth number released on Thursday brought back rate cut expectations to the fore. The economic growth slumped to a 13-quarter low of 5.7% in Q1, compared with 7.9% in the same period last year. The growth figure came in lower than expected following a relatively higher base of 7.9% for the year-ago period, a higher deflator and a 45% annual jump in central government subsidies. Post the 25-bps rate cut witnessed in the Reserve Bank of India’s third bi-monthly monetary policy, expectations of further rate reduction almost disappeared even as consumer price index (CPI) inflation came in higher at 2.36%.
However, market participants believe that the rally in bonds seen on Friday will be accentuated if inflation for August softens again. The benchmark yield fell as low as 6.47% during the day before closing at 6.48%. Vijay Sharma, executive vice-president for fixed income at PNB Gilts, pointed out that the disappointing GDP growth rate has rekindled hopes of a rate cut by the RBI among market participants. “The yields may continue to behave in a range bound manner as they have been doing in the last several weeks. The bond markets may spend more time in the range of 6.45% to 6.60% going forward,” Sharma pointed out. The five-year overnight indexed swap (OIS) rate fell four basis points to 6.17%.
Meanwhile, the rupee on Friday fell 11 paise to close at 64.03 to the greenback following significant dollar buying by banks to the tune of $400-500 million. “It could be the nationalised banks buying dollars on behalf of the central bank. However, it is also believed that certain foreign banks were buying dollars for their corporate clients,” a dealer pointed out. Friday’s fall was the biggest one-day depreciation for the currency in more than three weeks. The rupee has been flip-flopping between 63.90 and 64.04 over the last week. Dealers are of the view that it is witnessing strong support at 64.04 levels as exporters look to cash in on any movement beyond the 64 levels.
Foreign fund flows are also supporting the currency. So far this year, foreign portfolio investors (FPIs) have poured in over $19.89 billion into Indian debt while equities have witnessed a net inflow of $7.16 billion. Moreover, with the appreciation of the rupee, the central bank has also shored up its forex reserves which now stand at a record high of $394.55 billion.