Indian government bond yields rose to their highest level this month on Thursday as bond prices declined, tracking a fall in US Treasuries after the US Federal Reserve Chair Jerome Powell’s post-policy remarks dampened expectations of another interest rate cut in December.
The benchmark 10-year bond yield climbed to 6.5502%, its highest intraday level this month, compared with 6.5354% at the previous close.
The on Wednesday cut its benchmark interest rates by 25 basis points (bps) to a range of 3.75%-4.00%. with two policymakers dissenting. Following the policy announcement, the probability of another rate cut in December dropped sharply to 68% from 91% prior to the meeting, according to the CME FedWatch Tool.
In reaction to Powell’s remarks, US Treasury yields rose, with the yield curve bear-flattening—two-year yields climbed 11 bps while 10-year and 30-year yields advanced around 9 bps each. The in line with the move in yields, and the pared gains to end nearly unchanged.
“The call for another 25 bps cut in December is now well tied to how shaky the labor market gets ahead and how discouraging the labor numbers get when the government reopens. The Fed’s remarks add to our unease and scepticism of the market’s Goldilocks view,” said Madhavi Arora, Chief Economist at Emkay Global Financial.
From Indian bond markets perspective, Naval Kagalwala, COO & Head of Products, Shriram Wealth Ltd. said that the focus now shifts to trade negotiations between India and the US, extent of INR depreciation, and RBI’s liquidity management approach (given an increased talk around a possibility of the central bank doing OMO purchases to allow the yield curve lower and support bank deposits growth).
RBI Policy Expectations after US Fed Rate Cut
On the domestic monetary policy outlook, Arora noted that while the Reserve Bank of India (RBI) has shown a “willingness” to ease policy, the Fed’s cautious stance introduces an additional factor for consideration, though not one strong enough to alter the RBI’s overall bias.
“EM central banks, led largely by Asia, have become more circumspect as their rate cutting cycles matured and disinflation slowed. Surging Asian tech exports and fiscal stimulus have reduced the urgency to cut rates to counter demand slowdown. India has been no different, even as the continued to show willingness to ease, if growth falters and inflation continues to surprise further. Fed’s wait-and-watch approach adds another variable to the EM central banks’ reaction function, albeit not strong enough to dominate the policy biases.” said Arora.
The RBI’s policy minutes released earlier this month had indicated room for further rate cuts, supported by a benign inflation outlook.
Vishal Goenka, Co-Founder of IndiaBonds.com, said the U.S. Fed’s rate cut gives the RBI a “clear green light” to lower the repo rate in its upcoming meeting in early December.
“RBI’s last policy was defined as a dovish pause and that’s exactly what it did to markets by reigning in further widening of long end government yields. However, for proper transmission of earlier rate cuts to come through the banking sector, a flatter and lower long end yield curve is required. With US cutting rates, I would expect RBI to also move in the same direction and long end government bonds look attractive,” said Goenka.
Meanwhile, India’s retail inflation eased to an eight-year low of 1.54% in September, driven by a sharp fall in food prices. Investors are also watching progress on a potential India–US trade deal, which could reinforce expectations of further monetary easing.
Market participants will closely track the RBI’s ₹32,000 crore ($3.62 billion) bond auction on Friday for cues on investor demand.
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