Indian bonds rise as RBI chief’s comments revive interest rate cuts

Indian government bonds rose in early deals on Tuesday, building on the previous session’s rally, with dovish comments from the central bank chief boosting expectations for a rate cut next month. The benchmark 10-year yield stood at 6.5085% at 10.20 am IST, after hitting a two-week low of 6.5017%. During the previous session, it had closed 5 basis points lower at 6.5194%. Bond yields move in the opposite direction to prices.

Reserve Bank of India Governor Sanjay Malhotra, in an interview with a local news channel, said there is scope to further cut the policy rate.

“At the last meeting of the MPC (monetary policy committee) in October, it was clearly communicated that there is room to cut policy rates. Since then, the macroeconomic data we have received has not indicated that the room to cut rates has diminished,” Malhotra said.

“Bulls have become much more confident following this statement, with many market participants returning to the December rate cut camp, which is clearly reflected in the bond market,” said a trader at a state-owned bank.

Sentiment was also supported by further appreciation in the rupee as the currency traded at 89.16 against the dollar, well above the all-time low of 89.49 hit on Friday. Traders are also looking forward to the RBI’s next steps on liquidity and bond yields. The central bank bought bonds worth 272.80 billion rupees ($3.06 billion) in the first two weeks of November, but traders believe this was just a substitute demand and not a signal for interest rates.

PRICES

Indian overnight index swap (OIS) rates traded with a receipt bias after Malhotra’s comments.

The one-year OIS rate was 5.4250%, while the two-year rate was 5.42%. The five-year yield was lower at 5.71%, after falling 6 basis points on Monday.

(JAS