RBI governor signals future rate cuts to be dependent on incoming data like inflation and growth numbers.
The money markets on Monday declined after Reserve Bank of India (RBI) governor Shaktikanta Das signaled that further interest rate cuts would be dependent on incoming data like inflation and growth numbers even as public sector banks booked profits by selling government bonds.
The benchmark 10-year government bond yield rose by 6 basis points (bps) to close at 6.42% on Monday, putting a hold on a three-week rally. On July 16, bond yields had fallen to 6.33%, a two-and-half year low, as bond dealers factored in the possibility of further rate cuts to boost growth amid lower inflation. “We expect two more rate cuts in FY20 as growth numbers suggest more easing, while bond yields are expected to further fall to the 6% level in the medium term,” said a debt fund manager.
While Das’ comments on upcoming rate cuts have had little effect on the yield movements, a section of bond dealers believe the rise in yields can be on account of some profit booking. “The yield movement today is by and large due to profit booking by public-sector banks as yields have been falling over the past few weeks,” said Ajay Manglunia, MD, JM Financial.
In an interview to Bloomberg, Das said he sees signs of recovery in economic growth and further monetary policy steps will depend on incoming data. “The accommodative stance will depend on how inflation numbers look, how the growth numbers look. Primarily on how inflation looks.” He further added that there is already a 100 bps cut in interest rates this year, as the shift in stance to accomodative by itself means a rate cut of 25 bps at least.
Meanwhile, the rupee on Monday depreciated by 11 paise against the dollar along with other Asian currencies to close at Rs 68.92 on heavy foreign portfolio investor (FPI) outflows from equity markets and a rise in crude prices following Iran’s seizure of a British oil tanker. The dollar weighed on emerging market (EM) currencies as traders factored in the possibility of the Federal Reserve not cutting rates as expected. “The market believes that the fed will not cut as much as expected and have positioned accordingly leading to the spike in the rupee and bond yields,” said Malay Shah, Head-Fixed Income, Indiabulls AMC.
Traders believe the rupee appreciation is going to be limited as of now as a stronger dollar will continue to weigh on EM currencies. “The rupee appreciation seems to be limited as of now, and it might depreciate further if it crosses the 69.05 level,” said Sajal Gupta, head- forex, Edelweiss.
FPIs have pulled out nearly $1.2 billion from Indian equities this month up to July 19 on the back of an inflow of $150 million in June. FPIs have been net buyers in Indian equities till June this year.
Alternatively, foreign investors have invested nearly $1.2 billion in the debt markets this month up to July 19.