Dovish RBI lifts bonds, yields at 18-month low

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Updated: June 7, 2019 3:04:26 AM

What cheered the markets was the announcement of a committee to review the liquidity management framework.

RBI, Indian bonds, CPI inflation, MPC, global markets, Banking system liquidity, ICICI SecuritiesThe central bank cut the repo rate by 25 bps to 5.75%, taking it to the lowest level in nine years but this had been pencilled in.

Indian bonds continued their rally on Thursday surprised by the shift in the change in the Reserve Bank of India’s stance to ‘accommodative’ from ‘neutral’, a more dovish monetary policy than expected. The central bank cut the repo rate by 25 bps to 5.75%, taking it to the lowest level in nine years but this had been pencilled in. The yield on the benchmark bond — 7.26% yielding paper maturing in 2029 — fell by 8 bps to close at 6.93%, the lowest since November 2017.

What cheered the markets was the announcement of a committee to review the liquidity management framework.
Dealers expect the yield on the benchmark to remain below the 7% level and forecast at least one more rate cut in the next six months. Bloomberg reported Naveen Singh, head of fixed-income trading, ICICI Securities Primary Dealership in Mumbai, as saying: “The RBI seems to be worried about economic growth and indications are they will cut more going forward. We may see the 10-year yield dropping to 6.75% by end-June.”

The RBI the consumer price index (CPI) inflation slightly upwards for H1FY20 to 3.0-3.1% and marginally downwards to 3.4-3.7% in H2FY20, with risks broadly balanced around the central trajectory. B Prasanna, group head of global markets at ICICI Bank, believes there is even more accommodation on the cards as the central bank is focused on growth and boosting private investment.

“The policy was very positive and was reinforced by unanimous voting and the change in stance to accommodative. The statement’s focus on supporting growth and bolstering private investment as long as inflation remains within the mandate, is also encouraging and leads us to believe that more accommodation is on the cards.”

The RBI said the core inflation is projected to remain soft in the near term on the back of significant weakening of demand conditions, however it noted an upside pressure on food prices. “There is scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demand, and in particular, reinvigorate private investment activity, while remaining consistent with its flexible inflation targeting mandate,” it said.

An internal working group will be set up by the RBI to review the liquidity management framework which would suggest measures to simplify the framework and submit a report clearly stating the objectives and quantitative measures of liquidity management by the central bank. The group is to submit its report by mid-July. Banking system liquidity was at a surplus of Rs 66,000 crore in June so far as against a deficit in April and most of May.

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