India’s debt and swap markets rallied on Tuesday as the Reserve Bank of India (RBI) reinforced expectations of an interest rate cut early next year.
The Reserve Bank of India held interest rates steady at a policy review earlier in the day, as widely expected, but said it could ease monetary policy by early 2015 depending on whether inflation cools further and on government efforts to shore up the country’s finances.
Indian markets initially extended losses in a knee-jerk reaction to the unchanged policy rates, but soon recovered as traders bet on monetary easing at the RBI’s next review in February.
The benchmark 10-year bond yield which rose 3 basis points (bps) in the immediate aftermath of the policy review, fell 6 bps on the day to 8 percent, its lowest level since July 22, 2013.
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Traders said they expect the debt and swap market rally to continue in the near-term, though the pace of the rally may slow until there is more clarity on the timing of the rate move.
“The bond market is running ahead, but there’s more conviction about policy easing by February,” said. Prasanna, economist with ICICI Securities Primary Dealership in Mumbai.
Banking stocks also rallied on rate cut bets while state-run banks gained on hopes for large treasury gains due to the fall in bond yields.
The NSE Bank index briefly turned positive after dropping as much as 0.5 percent earlier.
In the overnight indexed swap market, both the benchmark 5-year swap rate and the 1-year swap rate fell 13 bps each to 7.06 percent and 7.67 percent, respectively.
The two rates had ended at 7.16 percent and 7.75 percent, respectively, on Monday.
“OIS is pricing in cuts, but that doesn’t mean we can’t go any lower as everything depends on how fast the RBI cuts which in turn depends on how inflation pans out. I wouldn’t pay rates here but bonds definitely offer value,” said Kumar Rachapudi, a fixed income strategist with ANZ Bank in Singapore.
“The 10-year bond yield can move to 7.50 percent once the RBI starts cutting”.