Sovereign bond yields to consolidate ahead of monetary policy review: DBS

The post-Budget rally in the Indian bonds has lost steam and going forward the yields are expected to consolidate ahead of monetary policy review meet early next month, says a DBS report.

"Indications of a pause in the rate-cutting cycle and 30 bp slip in yields since the Budget, stoked profit-taking trades," wrote the bank's Economist Radhika Rao and FX Strategist Philip Wee.

The duo further added that the RBI Governor's comments that policy stance here on will depend on incoming data, nudged traders to pare easing expectations.

The ten-year yields (generic) bounced to 6.45 per cent on Monday from sub-6.4 per cent late last week.

According to DBS, RBI Governor Shaktikanta Das implied that three rate cuts in 2019 accompanied by a change in policy stance could be cumulatively considered as a 100 bps worth reduction in the policy rate, with transmission of these cuts likely to be the next priority.

As per the DBS research note, the RBI's preference to be data-dependent is not surprising, "as Indian benchmark rates have been reduced by the most year-to-date vs regional peers".

After the recent comments, expectations will be divided regarding a policy rate cut in Reserve Bank of India's ensuing meet early next month.

"Path thereafter is also clouded, but further easing cannot be entirely dismissed if inflation stays below the 4 per cent target, core inflation continues to moderate, rains bridge the shortfall and oil prices witness two-way price action," DBS said.

Moreover, high-frequency growth data also suggested that first quarter slowdown has spilled over into the second quarter, "necessitating policy support", it said adding "fiscally conservative Budget leaves the door open for monetary policy to take a growth-supportive role, particularly as inflation is below target".

The Reserve Bank's next policy review meet is scheduled to be held from August 5th to 7th.