The 10-year benchmark yield closed 2 basis points higher on Wednesday at 6.46% after the Reserve Bank of India (RBI) cut the repo rate by 25 basis points on expected lines but kept its policy stance neutral. “The decision of the MPC is consistent with a neutral stance of the monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth,” the RBI said in its policy statement.
“Bonds are unlikely to rally further considering the Reserve Bank of India has given a neutral stance on the monetary policy,” said Ananth Narayan, regional head of financial markets, ASEAN and South Asia at Standard Chartered Bank. On Wednesday, yield on the 6.79% government security maturing in 2027 — which is the 10-year benchmark bond — touched a low of 6.43%. It hit an intra-day high of 6.48% before closing at 6.46%.
Bond yields had already factored-in the possibility of a 25-bps cut in the repo rate and over the last few days traders are understood to have pared part of their long positions. Market participants had pointed out that any further softening will only be achieved if the tone of the central bank in the policy would be dovish. “There was a segment of market that expected some dovish commentary along with the 25 basis points cut. With the absence of any such dovish stance from the central bank, we saw a rise in yields in long-tenure papers,” said Vijay Sharma, senior executive vice-president at PNB Gilts.
The benchmark yield had hit a one-year low in November 2016 when it touched 6.187%. The yield curve had also flattened out after the consumer price index (CPI) inflation in June fell to 1.54%, prompting widespread rate cut expectations. The benchmark yield had moved close to the rates at which short-term commercial papers were getting priced. “The curve has steepened (now) by around five-six basis points and we expect more steepening in days going ahead,” Sharma said. The RBI on Wednesday proposed to allocate a separate limit of `5,000 crore to foreign portfolio investors for long positions in interest rate futures.