Bonds Rally in India as GDP Shock Puts Easing Bets Back on Table

(Bloomberg) -- Indian sovereign bonds rallied the most since early July as data showing an unexpected slowdown in economic growth boosted speculation the central bank will cut benchmark interest rates further.

Gross domestic product expanded 5.7 percent in the April-June quarter from a year earlier, an official report showed after the close of markets on Thursday. That was below the 6.5 percent median estimate in a Bloomberg survey of 45 economists and the 6.1 percent growth seen in the previous quarter. Bank of America Merrill Lynch said in a note that the weak growth data supported its call for a 25-basis point cut at the Reserve Bank of India’s Dec. 6 meeting.

The yield on government notes due May 2027 fell four basis points on Friday to 6.48 percent, its biggest drop since July 10. It climbed six basis points in August, the most for benchmark 10-year debt since April, as a steeper-than-expected rebound in inflation reduced bets of more easing. The RBI lowered the repurchase rate by 25 basis points on Aug. 2.

Bonds Rally in India as GDP Shock Puts Easing Bets Back on Table

“Rate-cut hopes, which had almost disappeared from the market, have been rekindled after the GDP data,” said Vijay Sharma, New Delhi-based executive vice-president for fixed income at PNB Gilts Ltd. “While the growth slowdown isn’t good for the economy, it is proving to be good for the bond market.”

India’s $2.3 trillion economy slowed as companies and retailers pared inventories of goods before the roll out of a nationwide sales tax, adding to the strain caused by Prime Minister Narendra Modi’s November cash ban.

Economic weakness should lead the market -- which expects flat rates until year-end and is pricing in only 40% chance of a 25-basis point rate cut by end-2018 -- to “at least price in fully a rate cut from the RBI,” Cristian Maggio, London-based head of emerging-markets research at TD Securities, wrote in a report.

The rupee fell 0.2 percent to 64.03 per dollar on Friday, after capping a second straight month of gains the previous day.

READ: Persistent Sub-Par India Growth Can Curb INR Gains: Commerzbank

India’s government sold 180 billion rupees ($2.8 billion) of sovereign bonds as planned at an auction on Friday, a statement from the RBI showed. The nation’s central bank is considering keeping the reverse repurchase rate as a floor for its proposed Standing Deposit Facility, according to bankers who attended a recent meeting with RBI officials.