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Informist, Friday, Dec. 6, 2024

 

By Aaryan Khanna

 

MUMBAI – If the Reserve Bank of India's interest rate decision Friday initially suggested to the bond market that the Monetary Policy Committee was close to delivering a rate cut in the near future, some traders were caught on the wrong foot with Governor Shaktikanta Das' comments, which suggested that lower interest rates remained some time away.

 

After the shocking GDP print of 5.4% for Jul-Sept, traders had expected the RBI to soften its tone considerably, with inflation warnings set aside and the MPC moving to support economic activity. While this did not mean a repo rate cut was on the cards, a reduction in the cash reserve ratio on Friday was considered a slam dunk, setting the stage for lower interest rates in February.

 

While the market did get its CRR cut and Ram Singh joined fellow external member Nagesh Kumar in the rate cut corner to signal an incremental, albeit unsuccessful, shift in policy, RBI Governor Das had other plans. In what may or may not be his last MPC meeting as governor of the RBI, Das branded the recent awkward CPI and GDP prints as an "aberration", saying that durable price stability is essential for high growth, and that the committee assessed the growth outlook to be resilient.

 

"The RBI has erred on caution," said Sandeep Yadav, head – fixed income at DSP Mutual Fund.

 

DAS OUT, PARTY IN?

With such limited softening in the tone of the MPC from its primary mouthpiece, traders were left with a bitter taste in their mouths, some of whom hit stop-losses despite not being positioned for a rate cut at all. To be sure, several traders had overplayed their hand after the latest GDP data and furiously back-pedalled. The froth in the market dissipated in a hurry as the 10-year benchmark bond yield on Friday surged from a low of 6.65% to a high of 6.75%, and is now seen in the range of 6.65-6.86% in the near term, with global developments to provide any additional cues.

 

"Going ahead, we believe markets will be range bound to approximately 10-15 basis points from current levels," said Prashant Pimple, chief investment officer – fixed income, at Baroda BNP Paribas Mutual Fund. "Despite the CRR cut, liquidity will remain at neutral levels going ahead," he added.

 

According to dealers, three factors led to the sharp sell-off which may have actually overstated the bad news from the policy. One, the weekly gilt auction, held just after the post-policy press conference, transmitted the negative market sentiment immediately to prices. Two, investors immediately trained their eyes on the upcoming US non-farm payrolls data for November due after market hours Friday. Third, the uncertainty around the RBI governor's tenure has clouded the market's outlook on monetary policy and caused traders to trim their investments in India's government bonds. Das' term as governor is scheduled to end Tuesday. Some traders had hoped for clarity this week on whether he would continue as governor--either from Das himself or the government--but the seasoned bureaucrat and central banker sidestepped questions and refused to give "any headline".

 

If Das does continue as governor in the same vein, traders see chances of a rate cut even in February dwindling.

 

"Honestly, after this policy you can't even be sure of a February rate cut, as long as inflation is even moderately high," a treasury executive at a private bank said. "If Das stays as governor, the possibility of that rate cut comes down to 60% – I wouldn't risk more than that."

 

MARKET WANTS MORE

The market is left with two sources of optimism. One, Das' term ends on Tuesday, and along with him, his steadfast tone on holding rates steady in the face of flagging growth exits the RBI. Two, the central bank recognises that a 50-basis-point cut in the cash reserve ratio is not enough to ensure adequate liquidity.

 

"The RBI can take its time over its future liquidity actions after today's (Friday's) CRR cut," said A. Prasanna, head of research at ICICI Securities Primary Dealership. "Over the next quarter or the subsequent quarter, the RBI can look at open market operation purchases as the next stage, but the central bank can take its time."

 

The market's favoured route for further liquidity infusion would be the RBI announcing an OMO (open market operation) purchase calendar. With the central bank directly buying bonds, prices are expected to shoot up, particularly in tenures the RBI chooses to purchase. This spells great news for the bond market given that the government's fiscal consolidation and bond buybacks in 2024-25 (Apr-Mar) have led to the effective net supply of bonds being lower than in FY24. At the same time, banks' balance sheets and insurers' appetites have only grown.

 

Bond traders must now wait for the MPC--and most importantly, the RBI's representatives on it--to have an epiphany. A rate cut in February is still priced in, and the bond market does not want to be left with no party to attend.  End

 

Edited by Tanima Banerjee

 

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