How RBI policy triggered exuberance in debt market
FPIs, which were sitting on the sidelines, are likely to re-enter the bond market.
Foreign portfolio investors (FPI) and select domestic institutions, which were sitting on the sidelines after a surprisingly hawkish central bank policy tone in February, are likely to re-enter the bond market, cheering the resumption of the slide in bond yields resume after about a quarter.
“Investors were skeptical whether the bank will announce a lower inflation forecast after changing its policy stance," said MS Gopikrishnan, head of Foreign Exchange, Rates and Credit Trading at Standard Chartered Bank. “The debt market is now all set to break the spell of inactivity, with overseas investors and local custodian banks rushing to buy debt securities.”
The Reserve Bank of India changed its stance on credit costs from "accommodative" to "neutral" in the February policy, and raised the reverse repo rate by 25 basis points in the April policy, a move earlier seen as a prelude to hardening rates.
The government’s benchmark bond yield dipped Thursday as low as 6.50%, its four-month low. It closed at 6.53% compared with 6.64% on Tuesday, a day before the RBI declared its latest bi-monthly policy.
The benchmark yield could slide another 15-20 basis points amid bond buying by investors, until the next policy in August.
“Many overseas investors, who had stayed away since February, are now seen rushing to buy Indian bonds, primarily the sovereign one,” said Jayesh Mehta, MD & Treasurer, Bank of America. “A sudden change in sentiment has stirred up the debt market as almost everyone was expecting a rate rise before the latest policy. Now, the RBI has hinted enough for a rate reduction in August-September, triggering a rally in bond market.”
FPIs have net invested Rs 76,912 crore in Indian debt securities this year, compared with about Rs 5,500 crore net sales during the same period last year, show data from National Securities Depository or NSDL.
“The RBI’s dovish assessment of the recent economic data, if sustained, has rekindled hopes for a rate cut in the second-half of FY18,” said Dhawal Dalal, CIO for Fixed Income, Edelweiss Finance. “This development is bullish for government bonds in the current “goldilocks” type macro-economic backdrop.”
India’s retail price gauge has dropped to a record low of 2.99% in April, from a near five-month high of 3.89% in March, because of the base effect and lower food prices. The RBI has now said that if the lower prices remain durable, it could well shift back to an accommodative policy stance.
“We will watch carefully in next few months the incoming data on inflation as well as real indicators of economic activity…If data so warrant, then (we would) act for a broader accommodation through the interest rate policy,” central bank deputy governor Viral Acharya said at a post-policy press conference Wednesday.