PM Narendra Modi’s stimulus raises bets by bond traders for RBI rate cut

By Subhadip Sircar
The interest-rate cut that the Reserve Bank of India has resisted may now be inevitable.

Sovereign bonds rallied, though in low volumes, after the government unveiled a 1.7 trillion rupees ($22.6 billion) stimulus to alleviate the economic impact of the coronavirus pandemic. The package, with a promise of more spending to come, is spurring bets that the RBI will have to cut policy rates in an emergency meeting or at the scheduled review on April 3.

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“There are expectations in the market that the RBI may announce some steps,” said Harish Agarwal, a bond trader at FirstRand Bank Ltd. in Mumbai. “No one wants to initiate a fresh short position.”

With record government borrowings slated to start in April, money managers have been calling for the RBI to follow in the footsteps of other Asian central banks and slash rates. The sovereign bond market has already been showing signs of great strain. It froze for a half hour before trades started trickling in on Tuesday and yields have risen more than 20 basis points since dropping to a decade low of 5.99% two weeks ago.

The yield on the benchmark 10-year bond dropped eight basis points to 6.22% on Thursday. Just 122.8 billion rupees worth of sovereign bonds changed hands, compared with this year’s daily average of 443.4 billion rupees.

Finance Minister Nirmala Sitharaman sidestepped queries on how the government will fund the spending, and the impact on the fiscal deficit, when she announced the package in New Delhi.

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The government may increase its budgeted 7.8 trillion rupee borrowing plan for the fiscal year starting in April and ask the central bank to buy some debt, Reuters reported before the stimulus announcement.

“A fiscal response is inevitable and isn’t a surprise as the government starts announcing it in tranches,” said Saurabh Bhatia, head of fixed income at DSP Investment Managers Pvt. in Mumbai. “There is less incentive to sell bonds for cash with just a few working days before the RBI policy.”

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The central bank will have to cut its policy rates by 50 basis points, according to Murthy Nagarajan, head of fixed income at Tata Asset Management in Mumbai.

“Stabilizing markets is paramount,” said Nagarajan. “We also expect the RBI to announce an OMO calendar and possibly open credit lines for mutual funds via banks.”