Money & Banking

With rate cut a given, Reserve Bank’s communication key to market recovery

Bloomberg October 3 | Updated on October 03, 2019

With a cut in interest rates a matter of how much not if, traders say the nascent recovery in the country’s bond market will gather pace only if the central bank gives a clear indication of further easing when it meets on Friday.

“They need to keep the market anticipating for more to come for investors to remain interested in buying bonds,” said Arvind Chari, head of fixed income & alternatives at Quantum Advisors in Mumbai. All 33 economists surveyed by Bloomberg see a rate cut on Friday, though the magnitude differs from 20 basis points to 40 basis points.

Ten-year bonds sold off despite the Reserve Bank of India cutting rates by an unconventional 35 basis points in August.

The reason: Governor Shaktikanta Das’ comment that a 50 basis-point reduction would have been excessive cast doubt about the size of future decreases. “The key is how well they communicate on how much lower the repo rate can go from here,” Chari said.

Yield on the 10-year debt fell five basis points to 6.61 per cent on Thursday in a third session of losses amid bets the RBI will deliver its fifth rate cut of the year.

The authority may lower the key rate by 40 basis points to 5 per cent, according to Abhishek Gupta, an economist at Bloomberg Economics in Mumbai.

“A reduction of that size will make it hard for the RBI to signal space for further easing,” Chari said. The market, which is recovering from a two-month sell-off sparked by fears of bloated bond supply, will interpret a 40-basis point cut as the end of the easing cycle.

“The RBI is in a tight spot,” Chari said. “More than the action, it is the communication that will be key.”

Published on October 03, 2019

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