DBS expects 25bp cut in August’19

With the recent Budget batting in favour of fiscal consolidation, India’s 10-Year (generic) bond yields have corrected sharply – from 6.75% ahead of the budget to 6.45% on 15 July 2019.

Stating this, Singapore’s DBS Group Research Report noted that correction in the rate sensitive 2Y yields was relatively smaller, from 6.23% to 6.17%, having already baked in monetary easing expectations.

“This has led to flattening in the yield curve vs a month ago, with 6.4% offering support for the 10Y, while 2Y yields stay above 6%. A strong dovish signal will be the next trigger for a break below,” the Bank’s Economist Radhika Rao and Rate Strategist Eugene Leow wrote in a market report on 16 July 2019.

Global drivers are supportive, as US yields harbour expectations of a dovish US Fed and a likely rate cut at the meeting later this month.

Domestic catalysts for bonds are largely positive in the short-term, barring Monday’s downbeat trade numbers.

June exports declined (-9.7% YoY) accompanied by a similar decline in imports, keeping the trade deficit wide at above US$15 billion.

Separately, June retail and wholesale inflation remained below target, whilst core CPI inflation continues to retreat mirroring subdued demand-pull pressures.

Oil prices continue to seesaw on geopolitical rumblings, with a break above US$70 per barrel needed to shake confidence in the currency and yields.

“These cement our expectations of a follow-up 25bp cut in August, a fourth this year,” said Rao and Leow of Repo Rate cuts by RBI.

“Beyond August, we are holding out for another rate cut, likely in 4Q19.”

If inflation continues to stay below 4%, helped also by a favourable spatial spread and narrower shortfall in the rainfall, more easing is in the pipeline, the two believes. fiinews.com