Bonds See Worst Loss in 3 Years on Rate Hold

The Economic Times - - Companies -

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

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