India Bonds Slide After Central Bank Dials Back Rate Cut Expectations

(Bloomberg) -- Sovereign bonds slid after the Reserve Bank of India Governor Shaktikanta Das said further rate cuts will depend on incoming economic data, forcing traders to dial back expectations of large easing in monetary policy.

The RBI’s switch to an accommodative stance in June in itself amounts to a 25 basis-point cut, on top of the 75 basis points of cuts since February, Das said in an interview in Mumbai.

The benchmark 10-year bond yield jumped seven basis points to 6.43%, halting a three-week rally that sent yields to the lowest in more than two years after the government promised fiscal restraint and proposed to shift a part of its borrowing overseas. The central bank’s next policy review is due on Aug. 7.

To read more about the RBI governor’s comments on the policy stance

Governor’s “comments are perhaps less dovish than what the market wanted to hear,” said Eugene Leow, a fixed-income strategist with DBS Bank Ltd. in Singapore. Das’ “comments are probably modestly negative, given that the govvies look overbought in the short term,” he said.

Sentiment was also dented by comments from Rathin Roy, a member of the Prime Minister’s Economic Advisory Council, who said the country is facing a “silent fiscal crisis” owing to a shortfall in tax revenue, and the government’s annual budget suggests it may have grossly underestimated the problem.

Interest rate swaps rose, with the 1-year overnight indexed swap rising 6 basis points to 5.47%. The rupee fell 0.3% against the dollar.

Some bonds traders were factoring in a 50-basis point cut in the next meeting as domestic inflation remained within the RBI’s limits and global crude prices stayed benign.

“Market positioning is such that slight bit of perceived bad news could see a fall in prices,” said Sandeep Bagla, associate director at Trust Capital Services in Mumbai. Bond yields had priced in a couple of rate cuts but Das’ comments have caused “nervousness” about the size of the reductions, he said.

Foreigners have been buying Indian bonds amid the world’s mounting stock of negative yielding debt. Global funds bought about $900 million of rupee debt since the July 5 budget on hopes that a fiscally prudent government will force the RBI to do the heavy-lifting on reviving growth and ease borrowing costs.

To contact the reporters on this story: Subhadip Sircar in Mumbai at ssircar3@bloomberg.net;Kartik Goyal in Mumbai at kgoyal@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Ravil Shirodkar, Anto Antony

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