RBI's Monetary Policy cut the repo rate by 25 bps Friday
Bond prices rise after the cut, here's what market participants have to say
India’s bond prices rose after the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) slashed the benchmark rate by another 25 basis points to pull down the repo rate to 5.25 per cent. Investors also celebrated as the central bank announced Rs. 1 lakh crore worth of government bond purchases through open market operations.
The cut today was the fourth rate cut this year, with the repo rate brought down by 125 basis points during the current year. RBI Governor Sanjay Malhotra said that though the external macroeconomic conditions remained uncertain due to trade and tariff policies with the US imposing 50 per cent tariffs on Indian goods, a record low inflation figure, coupled with a strong growth in the domestic economy, opened the case for the panel to unanimously decide on a rate cut.
India registered a CPI inflation of 0.25 per cent, a record low, for the month of October. Meanwhile, GDP growth was printed at 8.2 per cent, a six-quarter high for the second quarter of the ongoing financial year ending March.
The RBI also raised the GDP growth forecast for the financial year by 500 bps to 7.3 per cent, while reducing the CPI inflation forecast by 600 bps to 2 per cent.
“Given the recent inflation prints and the lack of transmission of lower interest rates in the banking sector, the RBI repo rate cut by 25bps is timely. Interestingly, the forward expectations of inflation have come much lower, opening the door for another rate cut if required before the end of the financial year,” Vishal Goenka, Co-founder of IndiaBonds.com said.
What does the rate cut mean for bonds?
Bond traders had mixed expectations going into the policy outcome. Bond prices rose sharply after the RBI cut rates, with the 10-year benchmark bond yield falling around 4 bps to 6.47 per cent after Malhotra’s statement. Market participants expect bond prices to rise more during the day after the Rs. 3,200 crore supply of the 10-year bond in the secondary market is released. Traders had taken short positions on the 10-year bond yesterday, due to caution before the MPC statement and to pick up the bond at cheaper rates than market prices at the bond auction.
Bond traders also rejoiced at the Rs. 1 lakh crore OMO purchases announced by the RBI, with Rs. 50,000 crore worth of buys in two tranches - December 11 and 18. An OMO purchase by the RBI reduces the market outstanding of a particular bond, leading to higher demand and a rise in prices of those bonds. Traders are waiting to see which bond tenures the RBI will decide to buy.
Additionally, the RBI also announced $5 billion dollar-rupee buy/sell swap for three years to be held on December 16.
"A total of Rs 1,45,000 crores of liquidity is expected to be injected in the next 15 days. This is for the month of December only, and further measures are expected in the fourth quarter of the financial year," Murthy Nagarajan, head of fixed income, Tata Asset Management, said. "This should take the ten-year yields to 6.25 to 6.30 (per cent) levels in the coming months from the 6.45 to 6.50 (per cent) prevailing now."
Though there were still some expectations that there could be another rate cut by the MPC in the current rate easing cycle, most market participants see this as the end of the easing cycle. This was based on expectations that a trade deal between the US and India could come soon, and inflation to pick up in the next financial year, along with the fact that the MPC voted to keep its policy stance ‘neutral’.
Market participants said that with the rate cycle seen near its end, buying in longer-term government bonds maturing in 15 years or more is expected to rise. This will be to capture higher capital gains in longer tenure bonds compared to their shorter tenure peers, as the per basis point fall in yields leads to a sharper rise in the former. However, long-term investor demand could be mixed in longer tenures as the supply of state bonds is expected to be higher in the final quarter of FY26. Compared to this, as issuances in longer tenure corporate bonds rise, investors are likely to pick up more stock of bonds maturing in 2-3 years.
“The idea is to make funding cheaper for governments and corporates, and the OMO purchases announcement should assist in boosting liquidity and flattening the yield curve. Following this, investors should look to lock in current high rates from corporates in the 2-3y segment and complement this by buying long-end government bonds for potential gains,” Goenka said.
