Indian bonds rally as weak GDP spurs rate cut bets

The rupee weakened past 72 mark tracking fall in emerging market currencies. The 10-year bond opened at 6.495% down 6 basis points.
The currency opened at 71.97 and touched a low of 72.07.(iStock photo)
The currency opened at 71.97 and touched a low of 72.07.(iStock photo)
Updated on Sep 03, 2019 10:07 AM IST
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livemint, Mumbai | ByRavindra N. Sonavane

The yield on the government 10-year bond fell on Tuesday after economic growth for June quarter slumped to an over six-year low, raising bets for deeper interest rate cuts by the Reserve Bank of India.

At 9.12 am, the 10-year bond yield was down 6 basis points at 6.495% compared with Friday’s close of 6.559%. Bond yield and prices move in opposite directions.

Data released on Friday showed that India’s gross domestic product (GDP) grew 5% in June quarter, missing the 5.7% median estimate of a Bloomberg poll.

Domestic financial markets were shut on Monday due to Ganesh Chaturthi.

Brokerage firm Emkay Research believes that with April-June GDP growth significantly lower than the Reserve Bank of India’s trajectory, it makes a case for at least another 50 basis points cut as the RBI policy is now anchored toward narrowing the output gap.

“We believe that growth has bottomed out as the base will start to turn favourable in the coming quarters and the effect of monetary easing will start to trickle down. With this growth number, it is almost certain that RBI will cut rates in the upcoming October policy”, said Edelweiss Financial in a 30 August.

A report by YES Bank, dated 30 August, said that after a sub-optimal performance in fiscal 2019, India’s GDP is likely to grow at a tepid pace in the current fiscal as well.

Following weak economic growth in the fourth quarter of FY19 and first quarter of FY20, second quarter of FY20 is also expected to remain subdued amidst broad-based muted growth in consumption and investment, as weakness in most lead indicators such as auto sales, PMI, railway freight traffic, core sector has continued well into Q2. Given the sharper than expected slowdown in GDP in Q1 FY20, YES Bank, has revised lower their FY20 GDP forecast by 40 bps to 6.3% (FY:19: 6.8%).

“With systemically important central banks turning dovish in the last few months, the current state of negative gap in both inflation and GDP growth would likely prompt the MPC to opt for another 40 bps rate cut(s) in the next one/two policy reviews. The road thereafter would get data dependent with overall monsoon out-turn, global trade outlook, persistence of the recent volatility in currency market, sustainability of the recent softness in global commodity prices, and last but not least would be the degree of anticipated revival in domestic growth momentum”, the report from YES Bank said.

Meanwhile, the Indian rupee fell past the 72 mark, tracking the decline in emerging market currencies as traders braced for a Brexit showdown in the UK Parliament.

According to a Bloomberg report, UK lawmakers plan to table a legislation on Tuesday to try and block a no-deal Brexit, setting up a showdown that could end in a general election.

The Indian currency was traded at 72.05 a dollar, down 0.9% from its previous close of 71.41. The currency had opened at 71.97 and has so far today touched a low of 72.07.

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Monday, December 06, 2021