Bonds bulls in India have more reasons to cheer this week. Receding inflation pressure and a new central bank governor widely seen to have a dovish bent mean the swap markets have started pricing in interest-rate cuts.
One-year onshore swap rates are factoring a 50 per cent chance of a reduction around April or June, or 100 per cent chance of a 25-basis-point cut in August, according to ICICI Securities Primary Dealership Ltd. That’s a turnaround from a view in October for a hike of 100 basis points over the next 12 months.
“With the softening of CPI trajectory in the near term, the market hopes that the Reserve Bank of India might take a softer stance in the near future,” said Kuldeepsinh Jagtap, senior vice president at ICICI Securities Primary in Mumbai.
Even economists expect the RBI to reverse its stance and lower rates thereafter.
The new governor’s “focus on growth and his view that inflation remains benign confirms our view that he is more neutral to dovish,” Sonal Varma and Aurodeep Nandi, economists at Nomura Holdings Inc. wrote in a note.
Consumer prices rose 2.3 per cent in November from a year ago, according to government data released after market hours Wednesday. That’s the lowest in 17 months and compares with a 3.4 per cent revised gain in October.
The sentiment in the local bonds has turned dramatically after the recent slide in oil prices. Yields on the benchmark 10-year debt have fallen over 60 basis points since end-September. It was down 2 basis points at 7.39 per cent on Thursday.