Source: Mint
Mumbai, August 1: Indian bonds closed on a flat note on Friday, yet it witnessed a slight rise throughout the course of the week. Investors are somewhat sitting on the sidelines, awaiting the Reserve Bank of India (RBI) policy decision expected next week.
Indian benchmark 10-year government bond yields closed at 6.3680%, a marginal decline from Thursday’s 6.3735%. Over the week, there was an uptick of 2 basis points after an up move of 3 basis points the previous week.
A Slightly Weak Demand in Bond Auction
By selling bonds, the government raised ₹320 billion (approximately $3.66 billion) on Friday. Somewhat weaker-than-expected demand during the auction kept yield levels from sliding further. Traders preferred to stay cautious ahead of the central bank’s meeting.
All Eyes Shift Towards RBI’s Decision
On Wednesday, the RBI will announce its monetary policy. Some members in the market continue to hope for one more rate cut. After all, inflation was last month at a six-year low. Lower inflation, generally speaking, enhances the chances of rate cuts and is, therefore, favorable to the bond market.
Nevertheless, a statement from RBI Governor Sanjay Malhotra recently dampened hopes. He said that now the central bank has set a higher bar for making further rate cuts, especially after it cut the benchmark interest rate by 50 basis points in June and shifted its stance from “accommodative” to “neutral.”
Shares View With Economists
Most economists, in a Reuters poll, expect that the rates will go unchanged in the August meeting.
According to a report by BNP Paribas Global Markets, “Weaker-than-expected inflation and sluggish growth argue for another rate cut. However, the RBI is unlikely to act at the August meeting, as another cut now could deepen market confusion. We now expect the RBI to cut the policy rate by 25 bps at its October meeting,”
Interest Rate Swap Market Remains Steady
OIS rates reflecting interest rate expectations did not display much movement:
- The 1-year OIS closed at 5.51%
- The 2-year OIS closed at 5.47%
- The 5-year OIS (more active) closed at 5.7150%
Outlook: Bond yields are expected to remain calm in the next couple of days, with markets maintaining a close watch on the RBI’s direction. The decision next week will act as an important step forward in formulating interest rate expectations in the remainder of the year.
