Bond market bleeds as Reserve Bank of India stands pat

By: | Published: February 9, 2017 4:27 AM

Ananth Narayan, head of financial markets at Standard Chartered Bank, said in an interaction with a news channel that he expected the prospect of future rate cuts to be discounted by the market.

Bond market participants expect the yield to remain in a range of 6.65%-6.85% in near term.Bond market participants expect the yield to remain in a range of 6.65%-6.85% in near term.

The 10-year benchmark bond yield increased by nearly 30 basis points on Wednesday to 6.74%, its highest single-day rise since September 2013, after the Reserve Bank of India decided to keep its repo rate unchanged at 6.25% and changed its stance on liquidity from ‘accommodative’ to ‘neutral’. Bond market participants expect the yield to remain in a range of 6.65%-6.85% in near term.

Ananth Narayan, head of financial markets at Standard Chartered Bank, said in an interaction with a news channel that he expected the prospect of future rate cuts to be discounted by the market. “And this is negative for the bond market. From the earlier estimate of a 5 bps sell-off, I think we would see close to 15 bps sell-off over the next few days.”

The change in stance is indicative that we might see a deeper impact of demonetisation as we go forward. There is little opportunity at the long end of the yield curve, and since the RBI has a target of 4% inflation by the end of the next financial year, we could see the bond yield remaining between 6.50% and 7%,” said R Sivakumar, head of fixed income at Axis Mutual Fund. He added that there was more opportunity at the short end of the yield curve, which will be the case as long as bank liquidity levels are high.

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The surprising change in the central bank’s stance caught the market unaware and pushed investors to sell bonds after the policy was announced. The change in stance was largely perceived by the market as an indication that any rate cut by the RBI was unlikely in coming months.

The market had factored in a 25-bps cut so obviously that there was some correction on account of that. But it was the change in stance on liquidity that really triggered such a big sell-off,” said Ashutosh Khajuria, executive director and chief financial officer at Federal Bank.

The reverse repo rate under the liquidity adjustment facility (LAF) remained unchanged at 5.75% and the marginal standing facility (MSF) and bank rate remained unchanged at 6.75% each. Most market participants expected a cut in the repo rate by 25 basis points to 6%, but all six members of the monetary policy committee decided to vote in favour of keeping rates unchanged.

The decision of the MPC is consistent with a neutral stance of the monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5% by the fourth quarter of 2016-17 and the medium-term target of 4% within a band of +/- 2%, while supporting growth,” the central bank said in its statement.

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