The 10-year benchmark bonds witnessed a minor sell-off on Wednesday as traders pared their long positions built ahead of the monetary policy and recalibrated their portfolio by going long on shorter-tenor securities. The benchmark yield fell to as low as 6.27% during the day before rising to an intra-day high of 6.398% — a movement of 13 bps. The yield closed the day’s session 3 bps up at 6.37%.
The sell-off in the benchmark paper post the announcement of a 35-bps rate cut was accompanied by buying activity in shorter-tenor bonds. For instance, the 5-year G-Sec yield closed down 7 bps at 6.15% while the 7-year G-Sec yield closed at 6.36%, down 9 bps. The yields on both these bonds even touched close to 31-month lows. Vijay Sharma, senior executive vice-president at PNB Gilts, said the bond market had been building up long positions going into the policy. “The main impact has been on the 10-year bond yield while the shorter tenors have not reacted so much. To me, this only means re-calibrating of positions by the trading community.
Beyond that, I do not think there is any change in the trend. The 10-year bond yield may eventually settle in the range of 6.15-6.20% in coming times,” he said. Sharma indicated that a section of the market had factored in a 50-bps cut and with the repo rate reduction being limited to 35 bps, it is likely that a further cut may be in the offing. “The Reserve Bank of India has categorically said that all the focus is on growth. That in itself is a dovish statement. We were expecting a 50-bps rate cut this time.
With the 35-bps cut, we believe another 25-bps rate cut may be in the offing.” Ananth Narayan, professor of finance at SPJIMR, believes that what happened in the market was in line with the ‘buy on rumours and sell on facts’ policy, profit taking and lightening of positions that lead to some correction in yields. “Before the last monetary policy in June, the benchmark 10 year G-Sec yield was at 7.05-7.10%. It is down to 6.38% now. That is a big 70 basis points move down already, and some consolidation and correction is natural,” he said.
According to RBI governor Shaktikanta Das’ statement, the monetary policy committee judged that with inflation projected to remain within the target, addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture. Market participants believe the focus of growth is an indication that at least one more rate cut may be in the offing. “Our very large real fiscal deficit and the government off-balance sheet borrowing do keep pressure on long-term yields. However, despite Wednesday’s yield correction, expectations of lower yields remain given the global context of historically low yields and and our own accommodative monetary stance,” Narayan said.