Bonds rally, rupee appreciates post surprise rate cut by RBI

But further rally in bonds may be limited

The surprise rate cut by the Reserve Bank of India (RBI) saw bond yields falling sharply in early trades.

The yield on the 10-year benchmark bond fell more than 10 bps in early trades to 7.66% compared with yesterday’s close at 7.77%.

The yield on the 10-year bond is trading near July 15, 2013 level when it had ended at 7.56%. But further fall in yields may be limited.

“The market had already anticipated a rate cut on February 3 when RBI will review the monetary policy. The surprise was that the rate cut happened today. Now another rate cut will not happen in Feb due to which from here on the yields may not fall sharply in the near term,” said Ashutosh Khajuria, president (treasury), Federal Bank.

Ahead of market hours RBI decided to cut the repo rate by 25 bps to 7.75% with immediate effect citing low inflation and government’s commitment to adhere to the fiscal deficit target.

Due to the rate cut even the currency appreciated sharply against the dollar. The appreciation was due to bullish equity market which attracted foreign flows.

The rupee appreciated to 61.71 in early trades but due to dollar buying by state-run banks, possibly on behalf of the RBI, there was some correction. 

“State-run banks were buying dollar due to which the rupee started weakening,” said Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai.

Yesterday, the rupee had ended at 62.15 against the dollar.