Rupee, govt bond stronger after US Federal Reserve's 50 bps rate cut

The Federal Reserve began its easing cycle with a somewhat unexpected 50 basis point rate cut, implicitly acknowledging that rates may have been held too high for too long

The rupee and government bonds strengthened on Thursday after the US Federal Reserve’s decision to cut key interest rates by 50 basis points, said market participants. The rupee appreciated by 8 paise to settle at Rs 83.69 against the dollar, whereas the 10-year benchmark government bond yield settled at 6.76 per cent, the lowest since February 25, 2022.

After the US rate-setting panel’s decision, market participants expect the Reserve Bank of India’s Monetary Policy Committee to open up space for a rate cut with a change in stance in October.

“Market is now looking at the fact that since the curve is already flat, demand is strong, rates are coming down, and chances are that the RBI might also give in to this and may cut rates or at least give some indication of cutting rates. I am expecting a change in stance in October,” said Naveen Singh, vice-president, ICICI Securities’ primary dealership. “It is not necessary that they will cut rates in December if they change the stance in October. They might push the rate cut to February too, but in the next policy they might open up space for a rate cut,” he added.

A segment of the market expects the domestic rate-setting panel to cut the repo rate by 25 basis points in December. They expect the yield on the benchmark bond to fall further to 6.60 per cent on the back of positive momentum.

“There was a broad view that there will be a change in stance in October and a 25 basis point rate cut in December, which remains the same,” said Vijay Sharma, senior executive vice-president, PNB Gilts. “The market shows a positive bias, with yields falling further to 6.60 per cent to 6.65 per cent (benchmark yield) in the next month or two,” he added.

“The bond markets may witness comparatively better inflows due to the rate differential trajectory continuing, as the RBI looks more set to depart from the ‘follow the Fed’ mentality for good, having created a robust and resilient Indian financial ecosystem, fuelled largely by domestic demand-supply metrics,” said Soumya Kanti Ghosh, group chief economic adviser, State Bank of India.

On the other hand, foreign exchange market participants expect the rupee to remain in a broad range of Rs 83.60 per dollar to Rs 84 per dollar as they expect that the RBI might intervene in the market with dollar buys and sales to contain excess volatility. Dealers said that the rupee did not appreciate further on Thursday due to the RBI's market intervention through dollar purchases.

“The RBI was there in the market on the downside. The rupee will remain in the range of Rs 84 per dollar on the upside and Rs 83.60 per dollar on the downside,” said V R C Reddy, head of treasury, Karur Vysya Bank. “As inflows are coming, definitely, the RBI will intervene and continue to try to contain the volatility. For the last two days, we have seen some good appreciation. I think the Rs 83.55 to Rs 83.60 per dollar level will be protected at least till the next monetary policy meeting,” he added.

In the bond market, the 10-year and longer-tenure government bonds are seen as lucrative by the dealers. “The 10-year and longer-term bonds, particularly those in the 10- and 15-year range, are favoured, with demand coming mainly from insurers and pension funds,” said Sharma.

The RBI has maintained status quo on rates and stance after hiking the repo rate to 6.5 per cent in February 2023. All eyes are now on the next review of the monetary policy scheduled between October 7 and 9.