Bond traders eye dovish RBI shift to spark rally in sluggish market

By Subhadip Sircar

 

Indian bonds have been stuck in listless trading in recent weeks, with analysts saying only strong dovish signals from the Reserve Bank of India this week may help rekindle bullish sentiment.

 

A 25 basis-point interest-rate cut, combined with clear guidance on further easing, may drive the 10-year yield lower by as much as 30 basis points, according to the Union Bank of India. PGIM India Asset Management sees room for a 10 basis-point decline on dovish commentary, while a lack of action risks triggering a selloff.

 

Some investors are turning optimistic, betting that the recent consumption tax cut will help reduce inflation and give the central bank more room to ease this year. Rising global uncertainty, including the steepest US tariffs in Asia on Indian goods, is also strengthening the case for policy support. 

 

The “market will look for somewhat more dovish commentary,” said Suyash Choudhary, head of fixed income at Bandhan AMC Ltd. “The backdrop for this is higher global uncertainty, and the additional space for policy easing also provided by the reduction in inflation owing to tax cuts.” 

 

Swap markets and most analysts in a Bloomberg survey expect the RBI to hold rates at its Oct. 1 meeting, though about a third expect a 25 basis-point cut. Any dovish signals from the RBI could revive activity in the bond market, where yields have moved within a narrow eight-basis-point range over the past three weeks.

 

A reduction in long-bond issuance over the next six months, announced on Friday, while keeping the overall borrowing program unchanged, may ease concerns about excess supply and support longer-duration bonds.

 

Traders are cautious ahead of the October policy after some were wrong-footed in the last two meetings. The RBI’s shift to a neutral stance in June and a rate hold in August despite easing inflation signaled a higher bar for cuts.

 

“Bond markets have low expectations going into this policy,” said Churchil Bhatt, executive vice president for debt investments at Kotak Mahindra Life Insurance Co. Ltd. “While a 25-basis-point cut is hoped for, muted price action suggests limited rally potential.” 

 

Inflation outlook

 

For now, traders are watching if the central bank will lower its inflation forecast, with the goods and services tax cut expected to trim inflation by 50 to 70 basis points, according to Trust Mutual Fund.

 

“Bond markets will be keenly watching for downward revisions to inflation projections,” said Jalpan Shah, head of fixed income at Trust Mutual. Any reduction for the first half of next fiscal year will give some guidance on future rate action, Shah said.