Treasurers hope for another cut in Budget

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Mumbai | Updated: January 16, 2015 2:37:59 AM

Treasury desks at most banks are pricing in another 25-bps cut in the repo rate by the Reserve Bank of India...

Treasury desks at most banks are pricing in another 25-bps cut in the repo rate by the Reserve Bank of India after the government announces its Union Budget in February. In all, policy rate cuts of 75-100-bps could be seen in 2015, bankers said.

The RBI surprised markets on Thursday by cutting its repo rate by 25 bps to 7.75%, a fortnight ahead of its scheduled bi-monthly policy on February 3. The central bank cited ease in retail inflation and said that “sustained high quality” fiscal consolidation was critical for further cuts.

“We could clearly expect a 25-bps cut after the budget and in all a 75-bps cut in the repo rate for the year,” said Ananth Narayan G, regional head of financial markets, South Asia at Standard Chartered Bank.

Ashish Vaidya, head of trading and ALM at DBS Bank, India, also agreed.

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“Going ahead, too, there would be a softening bias. We are expecting in all a 75-bps cut in 2015, which would take the repo rate to 7%. We could see the next cut after the Budget,” said Ashish Vaidya, head of treasury, DBS Bank.

Expectations of a rate cut have been gaining currency since December when the RBI, in its scheduled bi-monthly policy, said that it would not flip-flop once it changes its stance on monetary policy. RBI governor Raghuram Rajan had also said that he would wait to see the durability of the fall in inflation before acting on rates.

These expectations dragged the 10-year benchmark government bond yield by 20 bps in the last fortnight.

Traders said that at 7.68% yield, the 10-year bond reflected at least 75-bps cut in the repo rate. The 10-year bond yield dropped 11 bps intraday on Thursday after the RBI’s rate cut announcement before settling at 7.69%.

Bankers expect the 10-year benchmark bond yield to ease to as low as 7.40% by end of March and could fall by another 10 bps in the next one month.

“This is the best time to build duration and buy long-term bonds. The biggest gains are in these,” said NS Venkatesh, head of treasury, IDBI Bank.

In its statement on Thursday, the central bank noted that the massive drop in global crude oil prices, ease in domestic food prices and weak demand have dragged down retail inflation.

The RBI now expects retail inflation to be below 6% by January 2016 against its earlier prediction of a 6% reading. Retail inflation was 5% in December, data from the government showed.

RBI move propels bonds’ rise

Government bond yields dropped 11 basis points on Thursday after a surprise cut in the repo rate by the Reserve Bank of India fuelled expectations of further cuts going forward.

The yield on the benchmark 8.40%, 2024 bond fell to 7.66% intraday before settling at 7.69%.

The RBI slashed its repo rate by 25 bps to 7.75%, citing ease in retail inflation, and said that “sustained high quality” fiscal consolidation was critical for further cuts.

This is RBI governor Raghuram Rajan’s first rate cut after he took over as the central bank chief in September 2013.

Traders said that at 7.69% yield, the 10-year bond reflected expectations of at least 75-bps cut in the repo rate over the next six months. On a cumulative basis, most banks now expect a total of 100-bps cut in the repo rate in 2015.

The benchmark 10-year bond yield could further slip to 7.50% over the next one month. (FE Bureau)

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