Yield on the benchmark 10-year government bond rose on Wednesday while those on shorter tenor bonds fell, in an asymmetric response to the Reserve Bank of India’s (RBI) unconventional rate action.
Yield on the 10-year bond closed 3 basis points (bps) higher at 6.369% from its previous close of 6.339%. In contrast, yield on the five-year bond was down 7 basis points to 6.147%, four-year bond down 8 bps to 6.07%, three-year bond down 8 bps to 6.028%, two-year bond down 6 bps to 5.875% and one-year bond down 8 bps to 5.711%. One basis point is one hundredth of a percentage point.
RBI delivered a bigger-than expected rate cut of 35 basis points and assured adequate liquidity after its monetary policy committee meeting.
“The rally in short-term bond yields is due to the sharper rate cut than expected," an analyst said on the condition of anonymity. The analyst said higher tenor bonds missed the rally after RBI governor Shaktikanta Das said the central bank would calibrate further rate cuts depending on incoming data. The governor said future policy actions will depend on upcoming data sets.
Wednesday’s larger-than-expected cut takes the repo rate to a nearly nine-year low of 5.4%. The last steepest cut was 50 basis points in September 2015.
“RBI is committed to ensuring that sufficient liquidity is available so that the needs of all productive sectors of the economy are met. Towards this objective, the Reserve Bank will use its liquidity management instruments to ensure that the system’s requirements of both day-to-day liquidity and durable liquidity are adequately provided," the monetary policy statement said. RBI said it has injected a substantial amount of liquidity through a combination of instruments, including liquidity adjustment facility, open market operations and forex swaps.