Bond market upbeat with RBI on back foot as Covid-19 infections surge

Status quo on rates likely to be maintained for some time

With partial lockdowns being announced in parts of the country, notably in Mumbai and Delhi, the bond market feels the Reserve Bank of India (RBI) will be in no mood to tinker with its rates or accommodative stance for some time to come.
 
Depending on the course of the fresh surge in Covid-19 cases — daily infections have touched 100,000 — investors might expect a rate cut. But that is unlikely in the policy to be announced by the monetary policy committee on Wednesday.
 
The bond market has already started cheering the possibility of a prolonged status quo with a liquidity overhang. The yields on the 10-year bonds have fallen six basis points in the two trading sessions from the start of the fiscal. It closed at 6.122 per cent on Tuesday, unchanged from its previous close. The fall is in line with the easing in developed markets, and the cooling of oil prices. This eases the pressure on the central bank to some extent.
 
“The market sentiment is much better now than what it was in March. It is yet to be seen how the renewed surge of infections impacts growth numbers, but the lockdowns would mean RBI would most likely sound ‘cautiously dovish’ from ‘cautiously hawkish’ expectations earlier, which is good for the bond market,” said Gopal Tripathy, head of treasury at Jana SFB.
 
BofA securities said on Tuesday that a month of nationwide lockdown could reduce the gross domestic product (GDP) by 1-2 percentage points. Being defensive investments, bonds do well when the economy shows signs of slowing.

The bond market seems to be showing willingness for an “orderly evolution of the yield curve,” and as RBI Governor Shaktikanta Das likes to restore calm when yields shoot up, he will have less reason to engage with the market from the policy platform, as he had done in the past.
 
There is also now less scope for open market operations (OMO) in the policy. Das has already guided for at least Rs 3 trillion of OMOs, or secondary market bond purchases, this fiscal. This has come as a relief to market participants, and they are much more “cooperative” now as Das had once urged them to be, than “combative”.
 
“Following the RBI governor’s assurance, the market is expecting OMO to the tune of Rs 3-3.5 trillion. But the market would love to have an OMO calendar in the policy,” said Anand Bagri, head of domestic markets at RBL Bank.
 
“After the lockdown in major metros, growth numbers could take a hit. Hence, rate hikes may not happen this fiscal, and the normalisation of liquidity measures can get pushed to the second half of the fiscal,” Bagri said.
 
The International Monetary Fund (IMF) increased India’s GDP forecast by one percentage point to 12.5 per cent. RBI’s own forecast of 10.5 per cent is unlikely to be changed, despite the resurgence of the pandemic.
 
The market would want assurances in Wednesday’s policy announcement that this is indeed so. But it would be interesting to see if RBI expands its monetary accommodations any further. Certainly, there are some expectations of this, as is evident from the movement of the yield.
 
“The renewed uncertainties owing to surge in Covid cases and lockdowns have started fuelling expectation of further monetary easing, though not necessarily through cutting policy rate,” said Soumyajit Niyogi, associate director at India Ratings and Research.