Bonds See Worst Loss in 3 Years on Rate Hold
Mumbai: Indian bond yields rose the steepest in three years after the central bank left the cost of credit unchanged, signaling a likely pause in the current rate-easing cycle in Asia’s third-biggest economy.
The benchmark bond yield surged 31 basis points on Wednesday, its steepest climb since September 23, 2013, after the Reserve Bank of India also indicated a change in its stance on credit costs. The central bank commentary was in sharp contrast to Street estimates that had either penciled in a cut or the continuation of an accommodative stance on rates. Since 2015, the central bank has reduced rates by 150 basis points in five instalments to lower the cost of funds.
“The change of stance has triggered the crash in the bond market, which was largely expecting a cut or a positive bias in the policy rate,” said Ashish Vaidya, head of trading atDBSBank.“Whiletradersbooked losses, the buyers would be investors with a medium-term perspective. For now, a change in stance could well trigger overseas fund inflows in domestic debt securities.”
The six-member Monetary Policy Committee of the central bank said on Wednesday that its stance on rates are now ‘neutral’ from ‘accommodative’ earlier, underscoring the probable harmonisation of the Indian rate cycle with the credit out- lookintheUSandotherOECDcountries. The US had returned to a cycle of increasing rates last year after credit costs hit record lows for a protracted period to helptheworld’sbiggesteconomyclamber out of the subprime sinkhole.
“Investor sentiment is tilting towards end of rate cycle,” said Jayesh Mehta, managing director, Bank of America (India). “RBI is heeding global researches pointing US yield rises, which will come with spillover effects on emerging markets.” The benchmark yield closed at 6.74% versus 6.43% on Tuesday, a level last seen before the government’s currency swap that left the banking system with about ₹ 6 lakh crore in liquidity. The yield may now jump to 7% in the next one or two months. But, this would also create reinvestment opportunity for those traders with still bullishviewonratesoveraperiodof time. On Monday, an ET Poll of 18 market participants showed they had largely expected a quarter percent rate cut.
Some wealthy traders who shortsold in the interest rate futures market expecting no rate action in the policy have raked in profits. The currency market too seems to have stared at the country’s long-term growth outlook as the rupee rose against the dollar by 22 paise to 67.19.
To be sure, some still expect rate hardening is sometime away. “A change in stance really does not signify any immediate possibility of rate hike as it will take time to reverse a rate cutting cycle and even theglobalpolicymakersarenotsure as to how the world economy will evolve,” said Vaidya of DBS Bank. When the US Federal Reserve is expected to increase rates, an absence of domestic rate reduction helps maintain the gap between two countries’ yields on debt securities, a key trigger to attract overseas investors.
RBI commentary was in sharp contrast to Street estimates that had either predicted a cut or the continuation of an accommodative stance