RBI Cautious on Easing

Although the 25bps repo rate cut by RBI was in line with market expectations, the rates market response to the announcement was muted. In response to the policy announcement, the new 10Y benchmark Indian government bond (IGB) traded c.3bps higher, and the OIS curve bear steepened by c.2bps. 

Two factors are likely to have impacted market sentiment: (1) The RBI's revision of January 2016 CPI inflation forecast to about 6.0% from below 6%; and (2) the focus on risks to inflation from the monsoon.

Analysts have a Positive outlook on IGBs, and continue to hold to the long 5Y IGB trade recommendation (entry: 8.04%, current: 7.90%, target: 7.65%, stop-loss: 8.25%). While the RBI is likely to maintain a stable policy rate regime, the current spread of 65bps between the 5Y IGB yield and the repo rate implies attractive carry to domestic investors. Limited risk of a sell-off is seen in IGBs from current levels, even in the absence of further policy rate cuts. 

Moreover, Standard Chartered thinks June supply dynamics are favourable as redemptions of IGBs exceed planned issuance by c.INR 82bn and expects strong re-investment demand from domestic investors in the <5Y segment of the IGB curve. In June, Standard Charterd notes that there is no gross issuance in the <5Y  segment, and only INR 120bn (of total INR 610bn) of gross issuance in 5Y-9Y segment.