Growth-supportive policy anticipated





The post-Budget rally in the Indian bonds has lost steam, said Singapore-based DBS Group Research in its daily market report on 23 July 2019.

“Indications of a pause in the rate-cutting cycle and 30bp slip in yields since the Budget, stoked profit-taking trades,” wrote the bank’s Economist Radhika Rao and FX Strategist Philip Wee.

Ten-year yields (generic) bounced to 6.45% on 22July from sub-6.4% late last week (6.25% low at one point).

The Reserve Bank of India (RBI) Governor’s comments that policy stance here on will depend on incoming data, nudged traders to pare easing expectations, observed the duo.

Governor Shaktikanta Das implied that three rate cuts in 2019 accompanied by a change in policy stance could be cumulatively considered as a 100bps worth reduction in the policy rate, with transmission of these cuts likely to be the next priority, they believe.

The central bank’s preference to be data-dependent is not surprising, as Indian benchmark rates have been reduced by the most year-to-date vs regional peers, they pointed out.

After recent comments, expectations will be divided between a pause cut or not at the August review. DBS had earlier forecast a 25bp cut in August.

“Path thereafter is also clouded, but further easing cannot be entirely dismissed if inflation stays below the 4% target, core inflation continues to moderate, rains bridge the shortfall and oil prices witness two-way price action,” said Rao and Wee.

High-frequency growth data also suggest that 1Q slowdown has spilled over into 2Q, necessitating policy support. Deficit targets were maintained at the recent Budget, with a miss in revenue targets to further curtail the room to spend.

“A fiscally conservative Budget leaves the ‘door open’ for monetary policy to take a growth-supportive role, particularly as inflation is below target,” they said.

Global markets are also in a consolidative mode ahead of the European Central Bank rate review on 25 July 2019 where policymakers will reaffirm their dovish tones and convince markets that it has sufficient tools to address the ongoing slowdown, expects the DBS duo.

US Fed meets next week. A supported US dollar has kept the rupee under pressure in recent sessions.

10Y Indian Rupee bond yields are likely to consolidate within 6.35-6.50% in the run-up to the early August rate review. 2Y yields are seen around 6.0-6.1%.

“Cash conditions are flush with about Rs.1 trillion surplus, while an assessment of the liquidity framework by the RBI-appointed panel is keenly awaited,” said Rao and Wee in the joint report.


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