Bond yields decline on expectation of rate cut

After Fed action, market sees RBI following suit

After the U.S. Federal Reserve reduced interest rates on Tuesday to fight the economic slowdown due to the spread of COVID-19, there is growing expectation in the domestic market that the Reserve Bank will follow suit.

Bond yields softened on Wednesday amid rate cut hopes, with the yield on the 10-year government bond dropping 12 bps to close the day at 6.23%.

“We note other Asian central banks have already been easing on account of expected supply-led growth disruptions, while the RBI has been stealth easing via [long-term repo operation], partly as high inflation inhibited conventional easing,” Madhavi Arora, lead economist, Edelweiss Securities, said.

“However, as we argued post another sluggish GDP print last week, RBI could now front-load its impending rate cuts and could further the LTROs by as early as end March,” Ms. Arora said.

After cutting interest rates by 135 bps between February and October 2019, the central bank has hit the pause button. At the same time, it introduced long-term repo operationsthrough which it lends to banks at rates cheaper than prevailing market rates. “Coordinated easing measures taken by central banks open up an opportunity for RBI to look at easing. The correction in crude oil prices would help push inflation down, allowing RBI to look through the transient inflationary forces which had forced it to ‘pause’ last time. Interest rate sensitive sectors viz., banking, auto, real estate and housing finance would [benefit],” said Pankaj Bobade, head — Fundamental Research, Axis Securities.

Bank of America Merrill Lynch said Tuesday’s Fed cut supported the call of a 50 bps RBI rate cut in 2020.

“We see 50 bps risk to [first half of 2020] growth if the COVID infection worsens. As it is, we see FY20 growth at 4.9% and FY21 at 5.6%,” BofaML said in a note, adding that rate cut could happen during the June-August and Oct.-Dec. periods.

“We expect the RBI to inject $45 billion of durable liquidity in FY21, to pull down lending rates,” it added.

The rupee, which weakened in the last three sessions, ended 4 paisa higher on Wednesday amid a volatile trading as it hit the day’s low of 73.63 a dollar, closing at 73.19.

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