RBI bond intervention no risk for market fixated on rate cut

Benchmark 10-year yields seen extending declines from 3-week low yesterday

Traders in India are so convinced that slowing inflation will lead to a rate cut that the central bank’s increasing intervention in the bond market isn’t bothering them.

Benchmark 10-year yields are seen extending declines from a three-week low reached yesterday after data showed consumer-price gains slowed to a record, according to Kotak Mahindra Asset Management Co. and Standard Chartered Plc. That’s even as a Bloomberg survey indicates the Reserve Bank of India may sell Rs300 billion (Dh17.26 billion; $4.7 billion) more of notes via open-market operations this quarter to soak up excess liquidity.

“Inflation softening would certainly ignite hopes of an August rate cut,” said Lakshmi Iyer, Mumbai-based chief investment officer for debt at Kotak Mahindra. “That would give some cushion to the supply that lies ahead.” The yield range for the benchmark yield would probably drop by around 25 basis points from The RBI is balancing a need to absorb liquidity that was pumped into the banking system following the government’s shock note ban in November, and a dovish policy tilt given indications the economy is slowing. The bond market has seen views split, with local banks selling down debt even while Franklin Templeton Investments and other foreign funds have jumped into the market.

Overseas investors are net buyers of rupee-denominated debt for a sixth straight month in July, having raised holdings by Rs1.27 trillion since end January. They bought Rs73.3 billion of bonds on Tuesday alone. The 10-year yield fell three basis points yesterday to 6.44%. Meanwhile, the RBI took out Rs100 billion on July 6 via the first open-market debt sale in eight months, and has another planned for July 20. The central bank wants to move to a neutral liquidity situation from a surplus one. current levels, she added.

Back in November, the government’s move to scrap highdenomination bank notes led to the withdrawal of 86 per cent of currency from circulation. Local lenders had Rs3.08 trillion of cash parked with the RBI as of July 11, according to the Bloomberg Intelligence India Banking Liquidity Index, compared with a record Rs5.46 trillion in March.

Supply well absorbed

“The OMO supply is getting well absorbed because foreign purchases have been robust this year,” said Neeraj Gambhir, Mumbai-based managing director and head of fixed income at the Indian unit of Nomura Holdings Inc. “While incremental supply of OMOs is there, demand-supply looks well balanced.”

Gambhir predicted openmarket debt sales of as much as another Rs400 billion by September. The Bloomberg survey estimate is based on a median of responses by 10 traders.

Still, the latest consumer price data released Wednesday offers support for the bond market. Inflation eased to a record low of 1.54 per cent in June, from 2.18 per cent in May.

That’s adding to pressure on RBI to change the neutral stance it adopted just five months ago.