Bonds rally on rate cut expectations, OMO announcement

Bond yields rally on Reserve Bank of India's OMO purchase.

Indian bond prices gained for fourth consecutive session, hitting near 14-month high today on growing expectation of rate cut and announcement of open market operations by the Reserve Bank of India (RBI).

Also, the sentiment was also lifted on expectations that the strong mandate for the BJP will help the government at the centre to pursue bold reforms to revive the economy.

The 10-year bond yield ended at 7.167% – a level last seen on 5 April 2018, down 6 basis points from its Friday’s close of 7.225%. Bond yields and prices move in opposite directions.

On Friday, RBI said it will inject liquidity by conducting an open-market operation to buy 15,000 crore of debt on 13 June.

“The bigger mandate for NDA this time will ensure a stable and pro-reform government for the next five years. We see government focusing on reflating the rural economy and also showing thrust on infrastructure spending, all measures to revive the cyclical slowdown,” said Kunal Shah, debt fund manager at Kotak Mahindra Life Insurance.

Shah expects that with the favorable domestic and global environment in the near term, the bond yields will trade with a downward bias. Also, RBI’s pro-active liquidity infusion and rate easing can push yields towards 7% in next 3-6 months. However, Shah believes that if oil prices move back above $75, the easing expectations will moderate and yields may trade in the range.

Traders also keeping eye on the next budget for initiatives to tackle slowing economic growth, fiscal deficit target and borrowing targets.

According Fitch Ratings, the victory of the BJP in India’s general election reduces policy uncertainty in the near term and gives the BJP a mandate to continue its economic reform efforts. The final budget for the fiscal year ending in March 2020 (FY20), expected in July, will give an indication of whether or not the BJP will step up economic reforms and return to fiscal consolidation after moderate fiscal slippages in recent years.

Last week, BJP won over 300 Lok Sabha seats out of 542. Traders also eyeing gross domestic product data for March quarter. A survey of Bloomberg economist predicts that the pace of growth in the first three months of this year was the slowest since the quarter through June 2017.

Meanwhile, the rupee closed little changed against US dollar at 69.51, up 0.03% from its previous close.