Fed raises RBI rate cut hopes, bonds gain

Mumbai: The US Federal Reserve’s move to slash rates by an aggressive 50 basis points to support its economy on account of the spread of the coronavirus have raised hopes of a similar move back home by the Reserve Bank of India (RBI) soon.

Indian bonds rallied on rate cut hope as foreign investors rushed back to high yielding sovereign paper they had abandoned in the last few days. The Indian 10-year bond yields fell 12 basis points to close at 6.23 per cent.

On the other hand, after a choppy ride, the USD-INR pair put a halt in the rally, ending the session lower by 7 paise compared to Tuesday’s close of 73.29.

Bond  yields fall when bond prices rise.

The 10-year US treasury yield is now below one per cent for the first time ever after the Fed cut rates. With US yields falling steeply, the yield differential factor appears to be coming back into play for several Asian currency bonds, including India’s. Most central banks are expected to lower rates with a similar motivation.

According to economists the spread of Covid 19 in India and growth concern,s which have been amplified by the low GDP number for Q3, may allow the MPC to find room sooner than expected for incremental rate cuts despite inflation being very high at above 7 per cent and unlikely to come down to the 4 per cent level any time soon.

Madan Sabnavis, chief economist at Care Ratings said, “It is understood that Indian enterprise will be impacted by the virus even if the spread is not within the country. Therefore there is reason to believe that the RBI may pitch in for a rate cut of up to 50 bps....The interesting thing is whether this will happen before the policy or on the policy date which is April. We believe that the rate cut can come sooner.”

Madhavi Arora, lead economist, Edelweiss Securities, said, “RBI could now front load its impending rate cuts and could further the long term repo operations (LTROs) by as early as end March.”

“India could gain in line with emerging market debt as foreign investors possibly rebuild their positions. Besides the possible RBI actions could further support the rally and could drift the yield towards 6.25 per cent by March end.”