Mumbai: The Reserve Bank of India (RBI) today brought the axe down on its policy repo rate for the fifth consecutive time and said in enough words that there is room to cut more.

But the yield on the 10-year benchmark bond rose to 6.65% after the policy from the close of 6.61% on Thursday. The Nifty was trading lower by 0.5% immediately after the policy announcement. Clearly, bonds sulked and equity indices didn’t seem to be too enthused by the outcome.

That is because the quantum of rate cut was just 25 basis points and the rather benign commentary on growth and inflation was anyway expected. One basis point is one-hundredth of a percentage point.

To be sure, most expectations of rate cut had centered on the 25 bps quantum but some such as Bank of America Merrill Lynch and Andrew Holland CEO of Avendus Capital were expecting larger reductions. “Markets sold off post policy, as markets had already discounted a 25bps rate cut. Some market participants were expecting a steeper rate cut of 40 bps (post an unconventional 35 bps cut in August policy), but their hopes were belied," said Avnish Jain Head - Fixed Income Canara Robeco Asset Management Company in a note.

The fact that this was accompanied by a sharp slash in the forecast of gross domestic product (GDP) for FY20 to 6.1% showed that perhaps the central bank believes deep cuts are not warranted.

Out of the six members in monetary policy committee (MPC), only long-standing dove Ravindra Dholakia voted for a 40 bps cut in the repo rate. All other five members including RBI governor Shaktikanta Das voted for 25 bps reduction. Clearly, bond traders would have wanted a different voting pattern that would have led to a higher rate cut. The accompanying commentary too disappointed including Das’s media interaction following the policy. Market participants were also looking for clarity on liquidity, which never came. In his comments in the interaction post policy, Governor Das didn’t go beyond the rhetoric on liquidity. “OMO remains in our toolkit. OMO will be done to deal with liquidity situation," Das said in his interaction with the media. He added that the RBI has not accepted the recommendations of the internal working group on liquidity yet.

To this absence of clarity on liquidity, if one adds the fact that the central bank is taking the government’s fiscal deficit at face value the going gets tough for bonds. It essentially means that the bond market is on its own to deal with excess supply if the government has to borrow more.

The bond market is already bracing for the onslaught of supply as the government’s borrowing plan for the second half begins. Even the states will borrow through bonds that would add up to a total supply of 4.4 trillion worth of bonds between October and March.

Bond markets like rate cuts to be front-loaded and don’t like to wait for them. Today’s 25 bps cut has left traders with no option than wait some more time for rate cuts. Meanwhile, there is supply coming.