1. Will RBI turn soft on interest rates? Rising bonds expect so

Will RBI turn soft on interest rates? Rising bonds expect so

Bond yields are falling ahead of the monetary policy review by the Reserve Bank of India (RBI) scheduled later this week, as bond traders expect the central bank to adopt a dovish tone in its policy review.

By: | Updated: June 5, 2017 4:44 PM
In its last four policy meetings, RBI has cut interest rates by 25 basis points, kept rates unchanged, changed its stance on liquidity from ‘accommodative’ to ‘neutral’, and increased the reverse repo rate by 25 basis points, respectively. (Image: Reuters)

Bond yields are falling ahead of the monetary policy review by the Reserve Bank of India (RBI) scheduled later this week, as bond traders expect the central bank to adopt a dovish tone in its policy review. In its last four policy meetings, RBI has cut interest rates by 25 basis points, kept rates unchanged, changed its stance on liquidity from ‘accommodative’ to ‘neutral’, and increased the reverse repo rate by 25 basis points, respectively.

The yield on Government of India’s 10-year benchmark bond has declined by 12 basis points since April when the consumer inflation fell to 2.99%, an all-time low since the measure was introduced. On Friday, the yield on the currently-issued 10-year benchmark bonds dropped one basis point to 6.61 percent, the lowest since 3 April 2017. The yield had jumped to an eight-month high of 6.99 percent in May. A Bloomberg survey predicts the yield may climb to 6.78 percent by June 30.

“The market is expecting a reset in RBI’s monetary policy tone going forward,” Rajeev Radhakrishnan, head of fixed income at SBI Funds Management Pvt Ltd told Bloomberg.

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Recently, Chief Economic Advisor, Arvind Subramanian had said that the RBI and the Monetary Policy Committee (MPC) should cut rates as all indicators, including core inflation, are in a steady state of decline and well within the central bank’s comfort zone. Retail inflation fell sharply to 2.99 percent in April, from 3.89 percent in March, due to lower cost of food items, including pulses and vegetables that showed a deflationary trend.

Also, Revenue Secretary Hasmukh Adhia had said that inflation will come down by two percent after GST is implemented. “I don’t think inflation will at all go up because of GST. We have taken special care to ensure inflation does not go up. Our internal estimate is that after the rates are decided, inflation should come down by two percent,” Adhia said.

“Sentiment is becoming more sanguine now after it turned bearish following the RBI minutes,” Vijay Sharma, executive vice-president for fixed income at PNB Gilts Ltd. told Bloomberg. “With the new dynamics of inflation emerging, including the GST and expectation of a normal monsoon, the view taking shape in the markets is that the RBI doesn’t have a case to remain hawkish,” Sharma added.

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