Government 10-year bond prices on Wednesday extended its decline and hit nearly three month low after global rating agency S&P warned that it may lower India's ratings if economic growth does not recovered.
Bond yields were already under pressure since the Reserve Bank of India (RBI) unexpectedly paused rates contrary to market expectation citing inflation concerns. Since RBI Policy, 10 year bond yield have gained nearly 27 basis points.
The 10 year bond yield closed over 4 basis points higher to 6.763% — a level last seen on 24 September from its previous close of 6.71%. Bond yield and prices moves in opposite direction.
Analyst believes that the RBI have taken a pause observing the fiscal slippage, hardening inflation and expect future rate cut only when there is clear visibility that the headline inflation will revert below 4%.
"Looking forward, by the time of the next policy meeting on 6 February, the inflation reading for December (due mid-January) will likely rise closer to the upper-end of the target band. Also, the Union Budget is likely to confirm slippage in the fiscal deficit of ~0.4% of GDP. On balance, the RBI is likely to pause again at its February meeting", said Nomura Research in a 5 December note.
In its policy, RBI revised its inflation forecast for the second half of the current fiscal to 4.7-5.1% from 3.5-3.7%. This comes after consumer price inflation quickened to 4.62% in October, breaching the 4% target for the first time since July 2018. The MPC noted that inflation is expected to moderate below target by the second quarter of fiscal 2020-21 and that it would wait for data for more clarity on inflation outlook. The next retail inflation data will be on Thursday and according to Bloomberg estimates, it may rose 5.22% in November against 4.62% in October.
RBI also sharply reduced its growth forecast for 2019-20 to 5% from 6.1%, with the committee noting that a delay in revival of domestic demand, further slowdown in global economic activity and geo-political tensions could pose downside risks to growth. India’s economy grew at 4.5% in July-September, the weakest pace in more than 6 years.
"Given upside risks to inflation beyond the 4% target over the next several months, we expect the MPC to keep rates unchanged for the rest of this fiscal, even while growth remains lackluster. On the other hand, while the nature and quantum of the expected counter-cyclical fiscal policies would need to be monitored, we expect a protracted growth slowdown, which could lead the central bank to cut rates in the first half of the next fiscal. This would however be dependent on the extent of mean reversion of the transitory factors on both food and core inflation", said ICICI Bank Global markets in a 5 December note .
The brokerage firm expect the 10-year benchmark to range between 6.50-6.80% as the markets will now focus on threats of fiscal breach and the borrowing program. Intermittent spikes beyond the range cannot be ruled out.
Meanwhile, the rupee strengthened to 70.84 a dollar, up 12% from its previous close. The home currency ended higher for fifth straight sessions.