US Fed rate cut: Indian bonds decline post decision; analysts expect RBI to remain hawkish in near-term

Indian bond yields dropped in the afternoon of September 19 following the US Federal Reserve's interest rate cut.

By 12:33 PM, the yield on the Indian 10-year benchmark bond, the 7.10 percent 2034, was at 6.7414 percent. This was down from 6.7896 percent at the opening and 6.7808 percent at the close of the previous trading session.

On Wednesday, the Federal Reserve cut its benchmark interest rate by half a percentage point, marking a bold beginning to a policy shift designed to strengthen the US labor market.

After their two-day meeting, projections revealed that a slight majority of 10 out of 19 officials supported reducing rates by at least another half-point during their remaining two meetings in 2024.

The Federal Open Market Committee decided by a vote of 11 to 1 to lower the federal funds rate to a range of 4.75 percent to 5 percent, after maintaining it at its highest level in two decades for over a year.

Wednesday’s decisive action underscores the increasing unease among policymakers regarding the employment situation. The Fed’s statement noted that “the committee is more confident that inflation is moving steadily towards 2 percent and believes that the risks associated with achieving its employment and inflation objectives are approximately balanced.” It also emphasized that officials are “firmly dedicated to supporting maximum employment” while working to bring inflation back to their target.

US Fed rate cut impact on India's bond market

Analysts suggest that the US Fed’s 50 basis point rate cut could spark a global rally in debt markets, enhancing liquidity and reducing borrowing costs for businesses and consumers. Additionally, the rate cut might weaken the US dollar and boost foreign demand for US bonds.

Back home, bond market analysts don't anticipate the Reserve Bank of India (RBI) to make an immediate move in response. However, they also noted that a sudden change in stance cannot be entirely dismissed.

“The RBI may remain little hawkish compared to other central banks. However, a surprise rate cut can't be completely ruled out. Indian bond market offers a very healthy real interest rate environment, which some argue might be very restrictive at the time when the government has been consolidating fiscal deficit much faster than market expectations,” said Jitendra Gohil, CFA Chief Investment Strategist, Kotak Alternate Asset Manages.