Indian two thousand rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Treasury Head at Top India Bank Sees Larger RBI Easing Scope

(Bloomberg) -- The head of treasury at State Bank of India says easing global and domestic inflation has given the central bank scope to cut the benchmark repurchase rate by 50 basis points.

“Consumer-price inflation is likely to fall further in June and July and should remain below 4 percent till November,” C. Venkat Nageswar, who is also deputy managing director at the largest Indian lender by assets, wrote in an e-mailed response to questions. “Inflationary pressures in the U.S. and Europe have eased off again in recent months and concerns related to higher crude prices are almost buried for now. Even commodity prices have fallen off.”

Ten-year bonds are rallying for a second month as gains in consumer prices slowed to a record low. The Reserve Bank of India surprised the market when it cut inflation projections on June 7, signaling a dovish tilt. That, along with the issue of a new 10-year benchmark security, has prompted Nageswar to soften his view, after he said in April that his firm was turning more cautious on bond investments.

Treasury Head at Top India Bank Sees Larger RBI Easing Scope

“I expect the new 10-year benchmark to trade around 6.30 percent – 6.20 percent levels by September, and then to drop further toward 6.10 percent if there’s a more than 25 basis points cut, which is likely,” wrote Mumbai-based Nageswar, who in April said the 10-year yield may rise to as high as 7.10 percent by September. “The previous view was for a different paper, and the new paper was always expected to trade lower.”

The yield on the 6.79 percent sovereign notes due May 2027 rose two basis points to 6.49 percent in Mumbai on Wednesday, down 24 basis points from the security’s first trading day in mid-May. Its close of 6.44 percent on June 21 was the lowest for a benchmark 10-year security since early February.

Bond markets “will be closely watching” the core inflation number -- currently at 4.25 percent, the impact of the Federal Reserve’s planned balance-sheet reduction and the outcome of the RBI’s August meeting, Nageswar said.

‘Much Lower’

The RBI’s monetary policy committee, or MPC, voted 5-1 to keep the repo rate unchanged at 6.25 percent at the June 7 meeting. Ravindra Dholakia, an economics professor at India’s top management school, broke ranks with his colleagues by calling for a rate cut -- and a hefty 50-basis point reduction at that -- minutes released on June 21 showed.

That saw HSBC Holdings Plc change its call for a prolonged pause in monetary policy to a 25-basis point cut in August. For analysts at ICICI Bank Ltd., the minutes reinforced expectation of a 25-basis point cut at the meeting, according to a June 23 report.

“We believe that there is scope for another 50-basis point cut,” Nageswar said, referring to August and beyond. “Our internal models are now showing much lower inflation in FY18.”