The past week brought in a bagful of good news for the debt market. Wholesale price index inflation for the month of March was reported at 5.96%, lowest since the Reserve Bank of India started hiking rates in the current cycle even after absorbing the recent series of adjustments in diesel prices. In more cheer for the market, Brent crude oil prices fell below $100 a barrel and gold prices crashed below crucial support levels to trade well under $1,400 an ounce. To boot, the March trade deficit came around $10 bn, much lower than recent average of $15 bn. These continuing positive developments pretty much ironcast a rate cut at the next policy review with some analysts now building a caste for a 50 basis point rate cut. Fixed income markets have not had such a cheerful environment for a long time in such a short span. Thus it was not surprising to see yields across the curve fall sharply with the benchmark 10-year government paper trading 10 basis points lower at 7.78%. Corporate bond yields fell even more sharply by 15 bps. Money market rates also eased by about 25 bps.
Going forward, a supportive environment for softer rates should continue to strengthen as the headwinds have begun to subside even though the challenges remain - the two most important problems being a large borrowing programme and the sensitivity of food price inflation to monsoon. While the met department has been quick as in every year to predict a normal rainfall for the current year, better assessment will be available as the monsoon breaks in Kerala next month. Another factor to consider is how much of these positive developments have been already priced in by the market. Given that, expect some volatility as thick supplies of government bonds begin in June and corporate loan demand picks up as industrial activity gains momentum. For now though, good times are set to continue.
The author is head of fixed income at Pramerica Asset Managers
