Bonds rallied on Thursday with the benchmark yield falling 17 basis points to close at 7.13% after the Reserve Bank of India (RBI) lowered its inflation expectations for the first and second halves of financial year 2018-19.
Bonds rallied on Thursday with the benchmark yield falling 17 basis points to close at 7.13% after the Reserve Bank of India (RBI) lowered its inflation expectations for the first and second halves of financial year 2018-19. The central bank trimmed its projections for the consumer price index (CPI) inflation for the first half of FY19 to 4.7-5.1% from 5.1-5.6% as stated in the February monetary policy, while it pared it to 4.4% from 4.5-4.6% for the second half of the fiscal. Thursday’s fall in the benchmark yield is the highest single-day fall since March 27 when the government’s decision to reduce the market borrowing in the first half and to reduce the duration of the paper led to a 29 bps single-day fall. Manish Wadhawan, managing director and head fixed income, Global Markets at HSBC India points out that one couldn’t have expected a softer monetary policy under current conditions. “They (the RBI) have brought down the CPI inflation target both for the first and second half of the fiscal. The fear of RBI talking about a lot of risks in terms of inflation, HRA or higher fuel prices didn’t materialise. However, the central bank chose not to elaborate on anything and has also acknowledged that the February CPI number was far lower than expected. The seasonal liquidity surge in the beginning of the fiscal year also added fuel to the fire, as there has been no fresh supply in the last quarter and the market position was light.
“Large number of players who have been selling so far have not entered the market yet and the positive news led to a change in the positioning. That has also contributed to the rally in the bond market,” Wadhawan pointed out. Before the government borrowing calendar was out, public sector banks (PSBs) had reduced their G-sec buying considerably as they were already sitting on huge mark-to-market (MTM) losses. This had reduced the trading activity in the market as other market participants also chose to remain on the sidelines. Vijay Sharma, executive vice-president for fixed income at PNB Gilts is of the view that the run-up in the prices of bonds is more a reflection of the positions in the market. “Market participants were not carrying too large positions. As a result, a slightly good news leads to a great impact on the prices as these players start entering into positions. The RBI has brought down its inflation projections which is a positive sign,” he said. On Friday, the first of the government borrowing auctions this fiscal of `12,000 crore will be conducted, which market participants believe will sail through smoothly unlike in the previous months when almost four auctions were cancelled. “Friday’s government auctions will sail through very smoothly. Ever since the government reduced the supply in the first half along with the duration of the notes, the fears of auction not going through smoothly has disappeared,” Sharma noted. The central bank has also announced that the quantum of total market borrowings by the state governments and the Union territory of Puducherry, for the first quarter of FY19, is expected to be in the range of `1.15 lakh crore to `1.28 lakh crore.