How RBI policy cheered the bond market

MUMBAI: Trading volumes surged to this years highest in the Indian government bond market Wednesday after the central banks pause action on the cost of funds in the broader economy shortened the odds in favour of a rate-reduction cycle beginning next year.

At Rs 85,464 crore, the daily volume more than doubled this week. The benchmark bond yield fell 13 basis points Wednesday to close at 7.44%, the lowest level since April 13 this year. Since November, the gauge plunged 41 basis points and pushed prices up, with bond traders betting against rate increases.

“Expectations of a rate cut next year, if the inflation trajectory sustains at 4%, and the expected open market operations have triggered the rally in the bond market,” said Shailendra Jhingan, MD, ICICI Securities Primary Dealers. “The pace of OMO purchase could rise up to Rs 2.96 lakh crore this financial year. The bond market rally could sustain this month, with the benchmark yield likely falling to 7.25%.”

Bond yields and prices move in opposite directions.

Softer consumer prices and sufficient cash availability in the banking system have turned bond investors rather bullish. The banking system has been running in deficit of late, with lenders borrowing more from the central bank in the past few months.

“In the rallying market, trading activities will increase in the coming days,” said Jayesh Mehta, MD and country treasurer at Bank of America Merrill Lynch. “A rate hike is out of the question now, unless oil prices spike. OMOs are likely to continue, adding to investor confidence.”

The central bank lowered the inflation forecast for the second time. This time it projects inflation to be at 2.7-3.2% in the second half of FY19, from 3.9-4.5% forecast during the October policy meeting.

For the first half of fiscal 2020, inflation is projected at 3.8-4.2%, with risks tilted to the upside.

“The committee is likely to remain on a prolonged pause,” said B Prasanna, Head- Global Markets Group, ICICI Bank, on the central bank policy. “This also gives us confidence that the scope for a cut in rates becomes possible if realized inflation in the next few months were to conform to, or undershoot, the revised path forecast by the committee.”

Global crude oil prices have fallen about 30% since October, reducing Indias oil import bills.

RBI injected durable liquidity amounting to Rs 36,000 crore in October and Rs 50,000 crore in November through open market purchase operations, bringing total durable liquidity injection to Rs 1.36 lakh crore for FY19.

Original Article