Bonds rally after RBI guv indicates accommodative policies will continue

Bonds rallied on Thursday after the Reserve Bank of India (RBI) governor indicated that its accommodative policies would continue for long, especially as the central bank saw inflation as a “temporary hump” and growth fragile.  

“Any hasty withdrawal of monetary policy support will negate the nascent or incipient recovery that is taking place,” RBI Governor Shaktikanta Das told Business Standard in an interview.

The local bond yields were falling as the US yields contracted sharply in the last few trading sessions. The fall in crude oil prices also helped ease the sentiment, but the governor’s statement took out all the uncertainties about the RBI’s actions after the May CPI inflation came at 6.03 per cent. The RBI targets to keep the inflation contained within the 2-6 per cent range. The June CPI numbers are expected to be much higher.  

However, Das said it would be transitory and should come down by the third quarter. “The main challenge is economic revival and growth,” he said.

The bond yields fell sharply after these comments.

The benchmark five-year bonds fell 9.3 basis points (bps) on Thursday, followed by a 9 bps fall in the four-year bonds. The near-term bonds reflect the immediate rate actions in the money market. The most traded 14-year bond fell 5.6 bps to close at 6.729 per cent. In two days, the 14-year bond has fallen about 15 bps, reacting to the fall in US 10-year bond yield. The 5-year Overnight Index Swaps (OIS) crashed 11 bps on Thursday.  

“Whatever expectation was built by the high inflation print was squashed by the RBI governor’s statement that accommodative policies should continue. The local yields have been falling after the US bond yields contracted sharply from 1.50 per cent to 1.25 per cent level in a short span of time. Crude prices have also softened, but the governor’s statement probably arrested the upward rise of local yields by a couple of months,” said Gopal Tripathi, head of treasury at Jana SFB.

The RBI is going to issue a new 10-year benchmark bond on Friday. The fall in yields help the RBI set a low coupon for the bond. The market also adjusted to the eventual outcome that the cut-off of the 10-year bond would be under a tight control by the RBI.  

According to Jayesh Mehta, head of treasury of Bank of America, the cut-off of the 10-year bond should come at around 6 per cent level.  
 

“It is all up to the RBI. But there is no reason to think that the RBI will accept a higher coupon for the new 10-year bond, especially after the US bond yields movement and the governor’s dovish comments, which really eased the pressure on the market,” said Mehta.

"The governor’s comments also cast doubt about whether any normalization is even likely in October since sustained growth requires more widespread vaccinations, which is only likely towards year-end,” said Nomura in a report.  

The bond yields should not rise in a hurry, notwithstanding the inflation print in the coming months, but there is no way the bond market can rest easy.

“Markets will remain edgy on both sides as they grapple with the recovery and inflation headwinds. Structurally, if we don’t see headwinds on opening up due to  any virus resurgence, we will look at continued higher inflation and possible taper down the lane that will keep Fixed income markets at tender hooks,” said Ashhish Vaidya, head of treasury at DBS Bank.