RBI's Dovish Stance Lifts Indian Bonds, Fails to Cheer Equities
Sovereign bonds rallied in India after the MPC cut its key policy rate and opened the room for further easing.
(Bloomberg) -- Sovereign bonds rallied, sending yields to their lowest in 18 months, after India’s central bank cut its key rate and left the door open for more easing to boost growth. The decision failed to please the equity market, which was expecting decisive measures to address the lingering cash crunch.
Growth impulses have weakened significantly, the Reserve Bank of India said as it reduced the repurchase rate by 25 basis points, as predicted by 31 of 43 economists surveyed by Bloomberg News. The six-member Monetary Policy Committee also switched its stance to “accomodative” from neutral.
“The RBI seems to be worried about economic growth and indications are they will cut more going forward,” said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership Ltd. in Mumbai. “We may see the 10-year yield dropping to 6.75% by end-June.”
While the benchmark 10-year yield fell 10 basis points to 6.92% at 4:44 p.m. in Mumbai, the S&P BSE Sensex of stocks lost 1.4% to cap the biggest loss this year. The index on Monday soared past the record 40,000 mark on expectations of a rate cut. The rupee was little changed at 69.2675 to a dollar.
Investors attributed the decline in stocks to the absence of specific measures to help the troubled non-bank financial firms. To be sure, the RBI said it would constitute a working group to review the liquidity management framework and suggest measures.
“‘Will it be too late by then?’ is what investors are wondering and this is one of the major reasons for the extension in declines of the stock indexes,” said Deepak Jasani, head of retail research at HDFC Securities in Mumbai.
Investor confidence has been shaken this week by signs that the crisis faced by shadow banks after the default of IL&FS Group last year is spreading. Dewan Housing Finance Corp. was lowered to default while media company Eros International Media Ltd. was cut 10 notches by credit rating companies, which cited concern about their ability to repay debt.
System liquidity is currently in surplus and the central bank will keep infusing liquidity as needed, Governor Shaktikanta Das said at a media briefing.
Yields have been sliding in India, reflecting a more benign global environment for bonds, as escalating trade tensions intensifies worries over growth. The trade war hit home last week with the U.S. saying it would impose tariffs on previously duty-free Indian products, a move that has coincided with a slowdown in Asia’s third-biggest economy and a shadow bank crisis that continues to be a drag on credit markets.
“The stock market is not cheering the rate cut as it had been factored in,” said Naveen Kulkarni, head of research at Reliance Securities Ltd. in Mumbai. “Something more was expected as concerns over growth and challenges regarding liquidity continue to linger.”
READ: India Bond Rally to Get a Boost on RBI Stance Change: ROUNDUP
--With assistance from Nupur Acharya and Ameya Karve.
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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