Bonds Stage Rally in India as RBI Surprises With Dovish Policy
Bonds in India gained and the rupee fell after the central bank held back on a widely expected hike in a key rate.
(Bloomberg) -- Bonds in India gained and the rupee fell after the central bank held back on a widely expected hike in a key rate, continuing with its benign policy stance amid a hawkish turn by most global central banks.
The yield on five-year bonds fell 15 basis points to 6.21%, while that on 10-year note declined by seven points to close at 6.73%. The rupee fell 0.2% to 74.9500 against the dollar to be emerging Asia’s worst-performing currency on Thursday. Stocks advanced.
That’s after the Reserve Bank of India kept the reverse repo rate, the rate at which it absorbs cash from banks, unchanged at 3.35%, belying majority expectations of a hike. Bond traders still remains concerned about the government’s plan to sell a record 14.95 trillion rupees ($200 billion) of bonds in the next fiscal year even as demand wanes.
“It’s more dovish than most people expected,” said Dhiraj Nim, economist and foreign exchange strategist at Australia & New Zealand Banking Group Ltd. “For bonds, some concerns remain as to how will a large borrowing program be accommodated, on which the RBI was largely silent, especially with tighter liquidity conditions ahead both onshore and globally.”
The RBI separately lowered the inflation outlook to 4.5% for next fiscal from 5.3% seen this year, which allows it room to focus on growth.
Bonds sold off in recent weeks on concerns over higher debt supply and a hardening in yields as central banks globally act on inflationary concerns. India has charted a different path on policy normalization seeing inflationary pressures as transitory. The 10-year bond yield is still up about 25 basis points this year.
Reserve Bank of India governor Shaktikanta Das said that the RBI will continue to focus on smooth completion of the government borrowing program. “Market participants also have a stake in the orderly evolution of financial conditions and the yield curve. It is expected that market participants will engage responsibly and contribute to cooperative outcomes that benefit all.”
The RBI also increased a special limit for long-term foreign investors in Indian bonds by one trillion rupees ($13.4 billion) to 2.5 trillion rupees, Das said. Authorities will take a calibrated approach to India’s inclusion in global bond indexes, he said addressing a media conference.
New Delhi didn’t enable a widely expected tax scrap for foreigners in the budget earlier this month, which would have paved the way for India’s inclusion in global bond indexes.
“The dovishness of the policy has taken the bond market by surprise,” said Churchil Bhatt, executive vice president at Kotak Mahindra Life Insurance Co. Ltd. “While policy normalization remains inevitable, the implied promise of a calibrated and guided approach by RBI, is likely to ensure an orderly evolution of yield curve in spite of a large government borrowing program.”
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