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Yields on government securities could thaw by as much as 20 basis points if the Reserve Bank of India cuts the key policy rate in its annual monetary policy, which is due on May 3, say market players.
However, in the run-up to the policy announcement, yields are likely to hold steady at current levels.
The market expectation is that the central bank will cut the repo rate (the interest at which banks borrow short-term funds from RBI) by 25 basis points to 7.25 per cent. One basis point is equal to one-hundredth of a percentage point.
Factored in
That the market has factored in a rate cut is underscored by that fact that last week, the 10-year benchmark government bond (which carries a coupon of 8.15 per cent) saw a mild rally, with its yield on Friday (April 26) dropping to 7.74 per cent (against previous Friday’s yield of 7.82 per cent) — the lowest since June 2010.
Falling commodity prices give the central bank more room to cut interest rates.
Last Friday, the benchmark security closed higher at Rs 102.60 against previous Friday’s close of Rs 102.09. Bond prices and yields are inversely co-related.
Mohan Shenoi, President, Group Treasury, Kotak Mahindra Bank, said: “The market has already factored in the repo rate cut. Till the monetary policy, yields are likely to remain stable at current levels. With expectations of a repo rate cut by the RBI, the yield on the 10-year government security may come down even further to trade in the 7.50-7.60 per cent range after May 3.”
Inflation outlook
Parthasarathi Mukherjee, President Treasury, Axis Bank, said: “The market is expecting a repo rate cut with easing inflation. This might help the bond prices (to rise) and yields may fall slightly.”
The Reserve Bank of India has cut the repo rate by 50 basis points since January to spur growth.
Anubhuti Sahay, Senior Economist, Standard Chartered Bank, said: “A 25-basis-point reduction in repo rate to 7.25 per cent on May 3 is certain. A sharp correction in wholesale price index-based inflation and benign global commodity prices amidst a weak domestic growth story has firmed up such expectations.”
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