Bonds decline after RBI cuts repo rate as expected
Mumbai: Indian sovereign bonds dropped after a central bank panel cut interest rates as estimated while maintaining its neutral policy stance. The rupee extended gains.
The monetary policy committee led by Reserve Bank of India governor Urjit Patel lowered the benchmark repurchase rate by 25 basis points to 6%, according to a central bank statement in Mumbai on Wednesday. The move was predicted by 41 of 57 economists surveyed by Bloomberg, while the rest forecast no change. Five of the six RBI panel members voted for a cut.
This year’s first reduction in borrowing costs comes after gains in India’s consumer prices slowed to a record 1.54% in June and gross domestic product expanded by 6.1% in the January to March quarter, the slowest pace in two years. Wednesday’s rate cut is widely seen as the RBI’s last chance to stimulate growth as other major central banks look set to join the Federal Reserve in tightening monetary policy.
“The only surprise to me is no surprise in the policy,” said Vivek Rajpal, a Singapore-based rates strategist at Nomura Holdings Inc. “I continue to see value in sticking with front-end bonds, which should perform well. A big reaction in the longer end shouldn’t be expected as the outcome is broadly in line with expectation.”
The yield on Indian government notes due May 2027 rose three basis points to 6.47% in Mumbai, according to prices from the RBI’s trading system. The rupee rose as much as 0.6% to 63.7125 per dollar, its strongest level since July 2015.
“Some of the upside risks to inflation have either reduced or not materialized,” according to the central bank’s statement. “Consequently, some space has opened up for monetary policy accommodation, given the dynamics of the output gap.” Bloomberg
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