India’s Benchmark Bond Yield Falls Below 7% On Rate Cut Expectations

India’s benchmark bond yield fell below the 7 percent mark for the first time in over eighteen months, as weaker than forecast GDP growth led to expectations of another cut in interest rates.

The 10-year bond yield opened at 6.95 percent on Monday compare to Friday’s close of 7.03 percent. Yields have now fallen more than 40 basis points in less than a month.

Lower global bond yields, a fall in oil prices and heightened expectations of monetary policy easing have pulled down yields, which had remained elevated despite 50 basis points in interest rate cuts since the start of 2019.

“If you look at Indian bond yields, it's primarily following what’s happening on the global front,” said Anubhuti Sahay, head of South Asia economic research at Standard Chartered Bank. “The U.S. bond yields have gone down by 40 basis points and a similar kind of mood is reflected in a lot of bond yields in India.”

Rate Cut A Given?

Growth in the Indian economy fell to a 20-quarter low of 5.8 percent in the January-March 2019 quarter. Growth slowed as both consumption and investment growth slipped. With growth falling and inflation remaining below the mid-point of the MPC’s target of 4 (+/-2) percent, the probability of a rate cut has risen.

With full year FY19 growth falling to a sub-7 percent levels and with limited upside to headline CPI, we do expect the RBI also to continue with its monetary easing, said economists at IDFC First Bank in a note on Friday. SBI Ecowrap, in a note dated May 27, said that a larger rate cut of 35-50 basis points is possible in the upcoming policy.

Global Factors

Global factors, too, have supported a drop in bond yields.

Brent crude prices fell to a three-month low in U.S. trade on Friday. Fears about weaker growth and subdued demand due to increased trade tensions between the U.S. and China have led to a turn in the direction of oil prices. Brent crude oil prices have dropped 10 percent in May to below $65 per barrel.

Fears of weaker growth and continued low inflation have led to fall in global bond yields, which has also impacted domestic yields.

The U.S. 10-year bond yield fell to 2.13 percent on Friday, a 20-month low. The 10-year German bund yield hit a low of -0.213 percent, the lowest since at least 1988.

However, once the global factors dissipate, the markets will focus on domestic fundamentals, Sahay said. This includes what the market expects the Monetary Policy Committee to do with interest rates after the bi-monthly policy in June, she said, adding that another factor would be the liquidity crunch in India’s banking system.

Given that the Reserve Bank of India has taken many steps to improve liquidity in the system through open market operations and forex swaps, “till September, liquidity can remain surplus but come second half of fiscal 2020, it will turn into negative again which is negative for the bond yields”, she said.