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Indian bond bulls are optimistic about the central bank’s easing of monetary policy. Image: Bloomberg
By Subhadip Sircar
Indian bond bulls are optimistic that the central bank will ease its hawkish monetary policy, paving the way for the next stage of a rally.
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While interest rate swaps predict a rate cut only in December, traders expect a possible change in the Reserve Bank of India’s stance to neutral on Wednesday. They also closely monitor any dovish signals in the authority’s commentary.
“We certainly expect softer language from the RBI, although the possibility of a change in stance remains balanced,” said Pankaj Pathak, fixed income manager at Quantum Asset Management Co. “This could be the trigger for a fall in prices. yields. »
The 10-year yield, down 34 basis points this year to 6.83 percent, could fall further to 6.25 percent by March, according to Nomura Holdings Inc., with IDFC First Bank forecasting a decline to 6 .50 percent. A continued decline could reduce borrowing costs for the government, which aims to reduce the budget deficit to a five-year low this fiscal year.
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Indian bonds are among Asia’s best performers this year thanks to more than $16 billion in foreign inflows boosted by their inclusion in JPMorgan Chase & Co’s emerging markets index.
Bonds also rallied on bets that slowing economic growth and the U.S. Federal Reserve’s 50 basis point cut in interest rates last month could prompt the RBI to follow suit. The fact that headline inflation remains below the RBI’s 4% target for two consecutive months has supported expectations of a change in accommodative policy.
“The October meeting will be the first MPC meeting this year where at least part of the market expects a rate cut or a change in stance,” Barclays Plc economists, including Shreya Sodhani, wrote in a note. That “makes it a relatively exciting meeting,” she said.
Still, the RBI may act cautiously amid a resurgence of tensions in the Middle East, which sent benchmark yields to a one-month high on Friday. Governor Shaktikanta Das reminded markets in September that he was in no rush to reduce borrowing costs.
The RBI’s new monetary policy panel is expected to keep the policy rate unchanged at 6.50 percent for the 10th consecutive meeting, according to the majority of a Bloomberg survey of economists.
Analysts still favor accommodative policy. Rate swaps price in about 70 basis points of rate cuts over the next 12 months, with a good chance of a cut in December, according to Nomura.
“The next leg of the bond rally may come from either accommodative monetary policy and/or greater foreign inflows,” said Nitin Agarwal, head of India trading at Australia and New Zealand Banking Group Ltd. soft landing, this will spur more inflows to emerging markets, including India, he said.
First publication: October 7, 2024 | 7:47 a.m. STI