Indian long-term bonds rally after RBI rate cut

The Indian long-term bonds rallied on Tuesday as the Reserve Bank of India reduced its policy rate by 25 bps to 6.50 pct. The benchmark 10-year bonds yield, which is inversely propositional to bond price fell to 4 bps to 7.37 pct as of 11:17 a.m. in Mumbai, the lowest for a benchmark 10-year security since June 2013.

The RBI Governor Raghuram Rajan cut the repo rate to 6.5 percent from 6.75 pct, the Reserve Bank (lowest since March 2011). Moreover, the RBI will buy up to 150 billion rupees ($2.3 billion) of sovereign bonds on April 7, according to a RBI’s separate statement.

“The rate cut and the liquidity injection mean there’s scope for bonds to climb further,” said Ankur Jhaveri, co-head of currencies and rates at Edelweiss Financial Services Ltd. in Mumbai. He also predicts that the 10-year yield could drop to as low as 6.85 pct this year.

Governor Rajan reiterated in his statement that the stance of monetary policy will remain accommodative and the central bank will continue to watch macroeconomic and financial development in the months ahead with a view to responding with further policy action as space opens up.

Apart from this, India also witnessed a sharp rebound in FPI flows for March 2016, FIIs invested US$4.2 billion in Indian equities, which not only recouped the outflows of the first 2-months of 2016, but also represented the highest monthly FII inflows in more than 3-years.