Bond Party Endures in India as Central Bank Takes a Dovish Turn

(Bloomberg) -- It didn’t matter that India’s central bank left the cap on foreign ownership of sovereign debt unchanged. That the authority unexpectedly cut its inflation forecast was enough to keep the party going.

The yield on the benchmark 10-year bond fell 17 basis points to a four-month low of 7.13 percent on Thursday, as traders took the Reserve Bank of India’s outlook on consumer prices to mean that an interest-rate increase isn’t imminent.

“The market is reading the policy as dovish compared with the last one, given the more benign inflation outlook,” Naveen Singh, head of fixed-income trading with ICICI Securities Primary Dealership Ltd., said by phone. “The biggest concern for the market was if the RBI was in readiness to hike rates. The answer from this policy is no.”

Instead of hawkish rhetoric, the central bank trimmed its inflation forecast for the fiscal first-half to a range of 4.7 percent to 5.1 percent, from 5.1 percent to 5.6 percent.

Yields have slid 49 basis points in five trading days, helped by the government’s decision last week to cut its first-half borrowing and after the RBI on Monday allowed banks to spread their bond-trading losses over four quarters. Before that, the market had sold off for seven straight months through February in the deepest rout in two decades.

Traders were expecting the central bank to further open up the market to foreigners, in line with a road map unveiled in September 2015 to raise the cap in tranches to 5 percent by this March. And they haven’t given up the hope.

“As far as foreign limits are concerned, RBI can still raise it going forward,” said Singh.

©2018 Bloomberg L.P.

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