With the rapid spread of the Covid-19 across the world, global investors have gone into a risk-off mode with a flight-to-safety approach being adopted.
With the US Federal Reserve announcing a surprise 50-basis-point rate cut and the US 10-year treasury yield falling to a record low of 0.74%, Indian bonds have followed suit, with the benchmark yield closing at a 11-year low of 6.18% on Friday. During the day, the benchmark yield fell to as low as 6.14%.
Experts pointed out that the bond market is widely expecting some sort of measures from the central bank that could materialise in the form of a rate cut, further long-term repo operations (LTROs) or even open market operations (OMOs). The RBI is set to conduct the last leg of the LTROs worth Rs 25,000 crore early next week.
Manish Wadhawan , founder and managing partner at Serenity Macro Partners, said with US treasury yields falling to record lows and negative yielding sovereign bonds around the globe increasing by the day, it is going to have an impact on India as well. “The dislocation in the markets leading to tightening of financial conditions may force the Reserve Bank of India to act to stabilise the economy. The central bank also has other tools at its disposal and I believe it could come out with those as well. One can expect more rate cuts, LTROs or OMOs in the times to come. With the RBI governor having a dovish stance, I believe an unscheduled rate cut cannot be ruled out considering the uncertainties that we are facing,” Wadhawan said.
With the rapid spread of the Covid-19 across the world, global investors have gone into a risk-off mode with a flight-to-safety approach being adopted. What is acting in favour of the domestic bond market is that crude prices have fallen significantly. On Friday, Brent Crude was trading below $48/barrel levels, its lowest since mid-2017. Any fall in crude prices is taken as a positive for India that is a net importer of oil.
Siddharth Shah, head of treasury at STCI Primary Dealer, agreed that with slowdown in growth and flight to safety, global sentiments are in favour of bond markets. “We are seeing that in the US treasury yields that have reacted significantly post the FOMC rate cut. Also, these things happened right when we are seeing LTROs being conducted. The market is also expecting that the RBI may act at some stage and go for a larger rate cut. Earlier, the market was expecting a 25-bps cut in the second quarter of FY21, but we are seeing these expectations getting preponed. The market has started factoring in 25-40 basis point rate cut going into April,” Shah said.
It is noteworthy that the rally in bonds is coinciding with foreign portfolio investors (FPIs) turning net sellers of Indian debt. Since the beginning of the year, FPIs have sold $1.8 billion of Indian debt.