RBI rate cut fails to enliven bond yields after $100-billion G-sec blues

The yield on the most-traded 2028 sovereign bonds fell just seven basis points, the rupee eked out a gain and the main stocks gauge closed flat after the 25 bps rate cut

So much for the Reserve Bank of India becoming the first major Asian central bank to cut its benchmark interest rate.

The yield on the most-traded 2028 sovereign bonds fell just seven basis points, the rupee eked out a gain and the main stocks gauge closed flat on Thursday -- hardly the reaction you’d expect when just 11 of 43 economists surveyed by Bloomberg News predicted the surprise decision.

Traders say the $100 billion bond sales unveiled last Friday by Prime Minister Narendra Modi’s government -- a decision that caused the yields on the most-traded sovereign bond to surge by the most in nine months that day -- and the uncertainty about the RBI’s debt-purchase support put a damper on sentiment.

“Fears about an excessive bond supply and doubts about the OMO support diminished the optimism over the rate cut,” said Vijay Sharma, executive vice president for fixed-income at PNB Gilts Ltd. in New Delhi. “The fear of large supply got reflected in a positive, but muted, market reaction.”

The RBI pointed to a rapid easing in price pressures as justification for the 25 basis-point cut and said inflation is not expected to breach its medium-term target over the next 10 months. The projection, based on an assumption that normal monsoon rains would keep a lid on food prices, can go awry, analysts said.

And the risk of further gains in prices of oil could bring inflation back to the fore, raising uncertainty about future rate cuts, they said.