Indian bonds trade flat after RBI rate cut

The Indian 10-year bond yield is unchanged on Wednesday, after snapping a long rally as the RBI cut the policy rate by 25bps to 6.50% on Tuesday, the lowest level since March 2011. The benchmark 10-year bonds yield, which is inversely proportional to the price of bonds stood at 7.62 pct as compared to 7.37 pct on Tuesday.

Yesterday, Finance minister Jaitley said that interest rates need to be more competitive; the government is trying to allocate additional resources for capital infusions into state-run banks; progress is expected in divestment of state-run companies in FY17; the government is working to ease the burdens of doing business in the country and improve the tax regime; lower oil prices have enabled the government to improve public spending.

“We expect Government bonds yield to be in a range of 7.4-7.7 pct. The RBI’s comment on having a neutral liquidity situation is a clear signal that there will be OMOs that will support the market. So open market operations activity will be fairly high”, said Tushar Pradhan, chief investment officer, HSBC Mutual Fund.

“From May and June, supply of government bonds will start building up as the government will start borrowing, states will start borrowing and Uday bonds will be out. There will be natural pressure on yields going up because of the sheer supply”, he added.

We foresee, besides cutting rates by 25 bps to a more than 5-year low, the Reserve Bank of India also dangled the prospect of another cut later this year if inflation trends stay benign.