Market pricing in a 50-bps interest rate cut by RBI
India’s 10-year bond yield has dropped 56 basis points to 6.33 per cent in the past one month.
The fall in India’s bond yield reflects higher probability of interest rate cuts in the near term by the Reserve Bank of India. The term premium, which is the difference between 10-year bond and the central bank’s repo rate, was 58 basis points compared with the long-term spread of 70 basis points. The current difference indicates that the market expects the repo rate to fall by 50 basis points from the current 5.75 per cent.
The foreign portfolio investors (FPIs) have increased allocation to emerging market debt as the several developed market central banks have turned dovish and nearly $13-trillion of debt trades with a negative yield. FPIs have bought almost $2.9 billion of Indian debt since the beginning of 2019. Of this, nearly $1.6 billion was in July alone, according to NSDL data.