Bonds reach new high since 2009 as crude oil prices fall

Bloomberg Mumbai | Updated on March 09, 2020

Will the RBI resume its rate cuts?

Sovereign bonds in India rose to their highest since 2009, amid rising risks to the nation’s financial system and as a slide in global crude prices added to hopes that the Reserve Bank of India will soon resume its rate cuts and take measures to bolster liquidity. However, stocks and the rupee fell.

The yield on the benchmark 10-year debt slid as much as 13 basis points to 6.05 per cent, a level last seen in 2009. The main equity index, S&P BSE Sensex, was down more than 4 per cent, while the rupee weakened 0.1 per cent.

“Recessionary conditions are emerging globally, and India cant remain aloof from it,” said Naveen Singh, head of fixed income at ICICI Securities Primary Dealership Ltd in Mumbai. “Brace for sharp reaction both from the government and the Reserve Bank of India.”

Oil markets crashed more than 30 per cent on Monday, after the disintegration of the OPEC+ alliance triggered an all-out price war between Saudi Arabia and Russia that is likely to give more headroom to RBI to cut rates.

Meanwhile, the central bank seizing control of beleaguered Yes Bank Ltd last week intensified the risk-off mood fuelled by the spread of coronavirus cases in India.

Another rate cut?

The Reserve Bank of India cut interest rates five times in 2019 to support an economy headed for its weakest expansion in 11 years, but has been on a pause since December following a spike in inflation.

Nomura Holdings Inc now expects two rate cuts of 25 basis points each in the April and June meetings versus its earlier call of a 25-basis-point cut in the second quarter, it said in a note on Friday.

The rupee fell as much as 0.4 per cent but has retraced most losses cushioned by the drop in crude prices. It was last down 0.1 per cent to 73.8850 to a dollar at 9:49 AM in Mumbai.

“The currency will determine the extent of the benefit of the crude price fall to Indian stocks. If foreign institutional investors sell shares then you should expect further weakness in the currency,” said Abhimanyu Sofat, Mumbai-based head of research at IIFL Securities Ltd.

Unconventional methods

Government bonds have rallied since mid-December, which has pushed benchmark 10-year yields down by more than 60 basis points through Friday, as the RBI has kept the banking system flush with cash.

The central bank has resorted to unconventional tools, initially adopting a Federal Reserve-style Operation Twist to bring down longer-end yields. It has followed that up with a European Central Bank-style repo operation to provide longer-term cheap money.

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Published on March 09, 2020
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