Bond Rally Tactical Rather Than Fundamental: The rally in the domestic bond market after the UK referendum has been largely unidirectional. Ind-Ra believes that the rally is more tactical than fundamental. On the ground, retail inflation surged as markets recovered sharply after the referendum. On the other hand, a well-distributed rainfall and a stable currency have been supportive to positive market sentiments. Ind-Ra believes that with continuation in momentum, the 10-year G-Sec yield can come down further without any immediate cut in the repo rate. However, the agency notes the presence of a significant tail-end-risk uptick in global bond yields as well as persisting uncertainty over who the new RBI Governor could be, which could derail the ongoing positive market sentiment.
Rupee Gains to Stay Capped: Following the initial fallout after the UK referendum, the US Fed rate hike bets have been rising as incoming data signals that economic recovery is on course. In the upcoming Fed meeting this week, however, the Fed is unlikely to go ahead with rate normalisation as the near-term outlook still remains marred with uncertainty, especially with the US elections coming up later this year. Additionally, Bank of Japan is slated to review its monetary policy this week. Currency markets are likely to stay volatile this week as investors internalise developments across the globe. An imminent signalling of a Fed rate hike is likely to keep the rupee gains capped in the medium term.
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