Bond yields decline by 2 bps despite Moody’s downgrade of India’s ratings

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Published: June 3, 2020 10:27 AM

Over the last few weeks, market participants have been anticipating the central bank to announce measures to absorb the additional supply of government bonds.

bond market, bond market sentiments, bond markets in IndiaThe market still holds on to the belief that the Reserve Bank of India (RBI) will step in to buy bonds.

The bond market on Tuesday ignored Moody’s downgrade of India’s rating, with the benchmark yield closing two basis points down at 5.76%.

Bond dealers say the action and the timing were not completely a surprise and the market still holds on to the belief that the Reserve Bank of India (RBI) will step in to buy bonds from the market to absorb the additional supply.

Moody’s on Monday had downgraded the government of India’s foreign-currency and local currency long-term issuer ratings to ‘Baa3’ from ‘Baa2’. The ratings agency had stated that the country’s policy making institutions will be challenged in enacting and implementing policies which effectively mitigate the risks of a sustained period of relatively low growth, significant further deterioration in the general government fiscal position and stress in the financial sector.

Vijay Sharma, senior executive vice-president at PNB Gilts, said the market had been expecting the downgrade for quite some time. “India’s rating still falls under the investment grade category and going further, if it falls below that level, we may be in trouble. The bond market is still alive on the hopes that RBI will be one of the major participants on the buying side to take care of the additional borrowing by the government and any upside in the yields. With yields refusing to harden on Tuesday, I don’t think the central bank will be in any urgency to act sooner on the factor of rating action. However, any delay by RBI or lowkey participation by RBI in buying the bonds has the potential to severely impact the bond market sentiments,” Sharma said.

Over the last few weeks, market participants have been anticipating the central bank to announce measures to absorb the additional supply of government bonds.

However, RBI has not yet announced any such steps. Between May 18 and May 24, RBI did not conduct any outright OMO purchases, according to the WSS document.

“It has been a while since the market has been expecting some measures from the central bank. However, with the yields remaining under control in recent times, RBI may not be under any sort of hurry to announce any measures,” a dealer said.

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