Government bond yields further eased on Tuesday to hit a fresh 18-month low as bets that RBI may cut repo rate in February increased after consumer inflation came in at 5% for December.
The yield on the 10-year benchmark 8.40%, 2024 bond, settled at 7.77%, down 5 bps from Monday’s close. The yield fell 90 bps in April-December period, the biggest fall in nine months since 2008. Bond traders expect the 10-year yield to ease by another 10 bps in the run-up to RBI’s bi-monthly policy on February 3.
“The market is pricing in several rate cuts throughout the year and these expectations are not based on a timeline for the rate cut. We could see around 50 bps cut until March if the inflation trajectory is favourable,” said Ashish Parthasarthy, head of treasury at HDFC Bank.
Bond traders said a rate cut looks a certainty as the retail inflation (at 5%) is way below the RBI’s forecast of 6% by March 2016. Also, unlike the expectation of RBI, inflation has shown only a modest rise in December compared with 4.38% in November in the absence of a favourable base effect.
“The benign momentum of December CPI inflation reinforces that the disinflationary impulse has continued beyond the transient base-effects and appears more fundamental in nature,” said Indranil Pan, the chief economist at Kotak Mahindra Bank, in a note.
At the last bi-monthly monetary policy, RBI governor Raghuram Rajan had said that if warranted, RBI may act out of the scheduled policy reviews. While there are expectations that RBI could cut before the scheduled February 3 review, such bets are few.
“There are some players in the market expecting a rate cut before February, this is not ruled out,” said Jayesh Mehta, the managing director and head of treasury at Bank of America-Merrill Lynch.
Rajan had left key policy rates unchanged for the fifth straight time in December, citing inflationary pressures that were yet to be contained.
Analysts said the easing inflation has been as per RBI expectations. The crash in global crude prices have made the inflation outlook benign as the country’s imported inflation could shrink given that 80% of its crude oil is imported. Deputy governor Urjit patel recently said the country would save $50 billion due to the “dramatic” fall in oil prices.