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Informist, Monday, Feb. 3, 2025

 

By Aaryan Khanna

 

NEW DELHI – Bond traders are putting most, if not all, of their eggs in the repo rate cut basket in February with the Reserve Bank of India's Monetary Policy Committee expected to deliver the long-awaited rate cut this week. If the panel does cut policy rates for the first time in five years Friday, the 10-year benchmark gilt yield may fall to its lowest since January 2022.

 

The median of estimates of 19 money managers, treasury heads, and economists polled by Informist pegged the yield on the 10-year 6.79%, 2034 bond at 6.60% at the end of the month. The yield on the benchmark ended January at 6.70%, on the eve of the Union Budget for 2025-26 (Apr-Mar). The bond settled at 6.67% on Monday.

 

The six-member rate-setting panel, to be headed by new RBI Governor Sanjay Malhotra, is widely expected to cut the repo rate to 6.25% from 6.50%. The three-day MPC meet begins Wednesday, with the decision to be released Friday. Traders are more certain than ever that the MPC will cut rates after Finance Secretary Tuhin Kanta Pandey Sunday said the government wanted the RBI to cut rates to boost the economy. With India's GDP growth seen faltering to a four-year low of 6.4% in FY25, and CPI inflation nearing the RBI's target of 4% in the coming quarters, some traders are even hoping for the repo rate –unchanged for two years – to be cut by 50 basis points.

 

Two of the returning members of the MPC – Nagesh Kumar and Ram Singh – already voted for a repo rate cut in December, Kumar for the second time. In the latter half of January, the RBI announced and conducted a slew of measures adding durable liquidity to the banking system, including buying bonds through open market operations at sizes last seen in 2021. From the 4-2 vote on status quo at the previous policy, some respondents said Friday's MPC vote may be a 6-0 in the favour of a rate cut.

 

"At this point, the government has put the ball in RBI's court, and there is every indication it will deliver," said Akhil Mittal, senior fund manager – fixed income – at Tata Mutual Fund. "The market is very hopeful because the RBI has been conducting open market operations and other liquidity infusions, so the next step is on Friday." Mittal expects the 10-year gilt yield to hit 6.50% by March-end, based on RBI buys of INR 1.5 trillion, against around INR 900 billion announced so far.

 

The repo rate cut is set to move the gilt yield curve down so convincingly that other factors are seen entirely secondary, including the monthly reading for inflation. Compounding the largesse is the RBI's OMO buys, with two more auctions for INR 400 billion scheduled over the next two weeks. The demand-supply dynamics are even more skewed with government bond supply ending on Feb. 28, and only INR 1.27 trillion worth of gilts scheduled for issuance.

 

To be sure, the fall in the 10-year gilt yield is seen less than the rate cut by the positivity already priced in. And if the MPC decides to hold off from a rate cut this week, the jolt upward will be swift, though not particularly sharp. Even the government setting its gross borrowing target at a higher-than-expected INR 14.82 trillion for FY26 was not enough to faze the market.

 

Regardless of the MPC's decision, demand from foreign portfolio investors is seen lacklustre. The rupee slid past 87 a dollar for the first time on Monday and ended at a record closing low after US President Donald Trump announced tariffs on imports from Canada, Mexico and China. The strength of the dollar and the corresponding favour from foreign investors to US Treasury securities may prevent significant inflows into emerging markets, including India.

 

"Despite the rate cut expectations, it will be a while before we see inflows from FPIs as US yields are elevated right now," Alok Singh, group head of treasury at CSB Bank, said. "Moreover, if the rate cut is not executed at the upcoming MPC, then the (10-year) gilt yield might range between 6.72% to 6.78%."

 

The narrative on FPIs could change by one wildcard during February: India's inclusion in Bloomberg's Global Aggregate. Respondents speculate the index provider may consider and announce the inclusion of India's fully accessible route bonds as early as this month, spurring up to $25 billion of inflows from index-linked funds alone. These bonds, which were added to Bloomberg's local currency emerging market debt index on Friday, have no limits for FPI investors.

 

The following are estimates at the beginning of the month for yield levels/range for the 10-year benchmark bond at the end of February:

 

ORGANISATION	Yield
Anand Rathi Global Finance	6.60%
Bank of Bahrain and Kuwait	6.60%
CSB Bank	6.60-6.78%
DCB Bank	6.55%
Edelweiss Mutual Fund	6.50%
HDFC Bank	6.50-6.60%
ICICI Securities Primary Dealership	6.55-6.60%
IDFC FIRST Bank	6.50-6.60%
IndiaFirst Life Insurance	6.65-6.70%
Industrial and Commercial Bank of China	6.50-6.55%
Karur Vysya Bank	6.62-6.65%
Kotak Mahindra Bank	6.60%
LIC Mutual Fund	6.50-6.75%
PNB Gilts	6.62%
Shinhan Bank	6.65%
STCI Primary Dealer	6.55-6.60%
Sundaram Mutual Fund	6.55-6.70
Tata Mutual Fund	6.60%
UCO Bank	6.60%

 

End

 

US$1 = INR 87.19

 

(With inputs from Srijita Bose, Cassandra Carvalho and Vidhushi RajPurohit)

 

Edited by Deepshikha Bhardwaj

 

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