Investors will be eying India’s key inflation data due Tuesday for clues on the longevity of a rally in Indian government bonds, which are trading at an almost three-year high.
Expectations of massive bond buying by India’s central bank and additional cuts in interest rates over the next few months are driving the rally in government bonds, because a lower interest rate would make bonds that were issued at higher rates more valuable.
The price of a benchmark 10-year bond maturing in 2022 was 103.79 rupees ($1.90) at noon local time on Monday versus 102.66 rupees a week earlier–a big jump in the bond world.
The Reserve Bank of India has already cut India’s benchmark interest rate by 1.25 percentage points since April 2012. In its most recent monetary policy meeting in early May, after announcing a quarter percentage point cut, the bank had said it has “little space” to cut rates further.
But investors don’t seem to be putting much stock in this.
Instead, they point to economic data, which they feel could make the RBI more comfortable about lowering rates, which will ultimately help India’s economy grow.
Analysts say inflation is easing more than the central bank had anticipated.
The wholesale price index — the most closely tracked measure of prices in India — likely rose 5.38% from a year earlier in April, slower than the 5.96% increase in March, according to the median estimate in a MoneyBeat poll of 11 economists. On Monday, India said itsconsumer price inflation decelerated for the second successive month in April.
Also, lower oil and gold prices in recent months are likely to reduce India’s current account deficit, something which the RBI had said would be a condition for it to cut rates.
A Mumbai-based chief dealer with a private sector bank says the rally in bond prices is likely to continue as most traders expect the central bank to “talk hawkish, but act dovish”, which means it will cut rates even as it gives a cautious guidance on future monetary easing.
Rahul Bajoria, a Singapore-based economist for Barclays Bank, expects a quarter percentage point cut at the central bank’s next monthly meeting in June, and possibly another half percentage point in the second half of this year.
Another reason for the recent bond rally is the RBI’s repeated assurance that it would ensure adequate cash in the banking system, including by buying back bonds from investors.
Indian banks have lately been facing a shortage of cash as they are struggling to attract deposits. To combat the lack of liquidity, the central bank has been printing money to buy back existing bonds from investors, most of which are banks.
The RBI bought 96.6 billion rupees ($1.8 billion) of bonds from the market last week to increase liquidity in the system.
report by – By Sudeep Jain