Government bond prices shot up on Monday, with the yield on the 10-year benchmark paper closing at its lowest level in two-and-a-half months, as traders grew increasingly optimistic about the Reserve Bank of India (RBI) adopting a less aggressive approach towards rate hikes at its policy meeting this week.
The rupee, too, strengthened versus the dollar and closed at 79.03 on Monday. The domestic currency settled at 79.27 on Friday.
The yield on the 10-year benchmark 6.54 per cent 2032 paper settled at 7.24 per cent, the lowest closing yield for the security since May 11. The bond had settled at 7.32 per cent on Friday. Bond prices and yields move inversely and a fall of one basis point in the yield of the 10-year paper corresponds to a 7-paise rise in price.
Hopes of the RBI signalling a less robust path of rate hikes have strengthened due to a sharp decline in crude oil prices over the past couple of months, as well as increasing concerns about global economic growth.
“Fear of missing out is driving this rally. The market is pondering ‘what if the RBI is dovish’? Buy bonds now — the comfort of going long has come back. That is why the market is reacting to even small daily changes in crude oil prices,” Naveen Singh, ICICI Securities primary dealership’s head of trading, told Business Standard.
After climbing to a 14-year high of $140 per barrel in March, Brent crude oil prices have now stabilised in the range of $100-105 per barrel. The most active Brent crude contract was at $102.04 a barrel at 6.15 pm IST.
Softening of crude oil prices reduces upside risks to India’s inflation, given that the country is among the biggest importers of the commodity.
The RBI, which has raised the repo rate by total 90 basis points to 4.90 per cent since May, is widely expected to lift the benchmark policy rate by 35-50 bps when it announces its next policy statement on August 5.
Around a month ago, traders were all but convinced that the RBI would opt for a 50-basis-point hike during the August policy, given that headline retail inflation remains well above the central bank’s target range of 2-6 per cent. The yield on the 10-year benchmark bond had jumped to a three-year high of 7.62 per cent on June 16.
But with concerns of a global economic slowdown being amplified by recent sets of weak GDP data in the US, bond traders feel the RBI may not be eager to upset domestic GDP growth too much, even as it seeks to rein in inflation.
The decline in oil prices has added to the hope of the central bank signalling that a large part of rate hikes in its current cycle may be over after the August policy.
With officials of the RBI, including Governor Shaktikanta Das, recently saying that there were signs of domestic inflation having peaked, bond traders were of the view that there was room for yields to fall further.
A senior treasury executive at a foreign bank said it was also possible that the RBI would reduce its current inflation forecast of 6.7 per cent for 2022-23, given that the average CPI inflation in April-June was around 20 bps lower than the central bank’s prediction of 7.50 per cent.
The rupee, too, strengthened sharply on Monday as the increasing pessimism surrounding economic growth in the US led to anticipation of the Federal Reserve slowing down the pace of rate hikes.
After suffering a bout of heightened volatility in the first 20 days of July, the local currency has significantly regained ground against the greenback. On July 19, the rupee had weakened to a lifetime low of 80.06 per US dollar.
“INR appreciated today against USD due to many factors — improved risk-on sentiment, less import covering on the expectation of further rupee strength, and exporter selling (of dollars). This looks like a bit of a trend reversal, but it’s still too early as macro factors haven’t changed drastically. Hence, we expect USD/INR consolidation around the 79/$1 pivot,” said Bhaskar Panda, executive vice-president, overseas treasury, HDFC Bank.