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India Gilts Review: Up as weak GDP data fuels hope of RBI rate cut

Tuesday, Sep 3, 2019

 

By Vaibhav Chakraborty

 

NEW DELHI – Government bonds rose sharply today as a severe slowdown in GDP growth raised expectations that the Reserve Bank of India would come to the economy's rescue by lowering interest rates further, dealers said. 

 

India's GDP for the June quarter slumped to 5.0% according to the data released post market-hours on Friday, the slowest pace in the last 25 quarters, and well below the growth rate of 5.6% estimated by a Cogencis poll. The GDP growth rate has plunged from 8.0% a year ago, and 5.8% in the preceding quarter.

 

However, bonds gave up a large part of their early gains as traders rushed to book profits when the 10-year benchmark bond yield fell below the psychologically significant 6.50% mark.

 

The 10-year benchmark 7.26%, 2029 paper closed at 105.12 rupees or 6.52% yield, as against 104.82 rupees or 6.56% on Friday. The bond hit the day's high of 105.48 rupees or 6.47% yield within the first hour of trade. Money markets remained closed on Monday on the account of Ganesh Chaturthi.

 

With consumer price index-based inflation rate trending well below the RBI's medium-term target of 4%, the central bank has ample room to address the current economic slowdown with cuts in interest rates, dealers said.

 

The RBI, which has already reduced its repo rate by a cumulative 110 basis points since February, is expected to lower interest rates by at least 25 bps at its next policy review on Oct 4, and leave the door open for more rate cuts.

 

Dealers now expect the central bank to turn aggressive in loosening its monetary policy, and do not rule out the repo rate being brought down below 5.00% in coming months. The benchmark policy rate currently stands at 5.40%.

 

RBI Governor Shaktikanta Das, in his post-monetary policy review press conference last month, had said that growth remains the utmost priority of the central bank.

 

"There can be a 40-basis-point cut in the upcoming monetary policy review as the repo rate may hit 5.00% or below levels," a dealer with a primary dealership said.

 

Despite the hope of a softer monetary policy, bond prices slid from the day's highs because of profit booking, and mounting concerns over the government's strained finances, dealers said.

 

Worries over the government's fiscal position came to the fore as data released over the weekend showed goods and services tax collections falling to a six-month low in August. The total GST collections declined to 982.02 bln rupees in August from 1.021 trln rupees in the preceding month.

 

"All the data released recently pertaining to GDP, inflation, monsoon, including global factors have been favourable for the bond market. However, the fall in GST collection raises concerns about government finances and increases the risk of fiscal slippage," a dealer with another primary dealership said.

 

The sharp slowdown in GDP growth also fuelled concern that the Centre might have to deliver a fiscal stimulus to revive the economy, dealers said. A fiscal slippage will add to the government's market borrowing, which is already at a record high of 7.1 trln rupees in gross terms for 2019-20 (Apr-Mar).

 

Market-wide turnover rose to 309.90 bln rupees, against 198.80 bln rupees on Friday, according to the RBI's Negotiated Dealing System-Order Matching platform

 

OUTLOOK

 

Government bonds are likely to open on a positive note on Wednesday as traders may bet on further cuts in policy rates following the sharp decline in Apr-Jun GDP growth. Bond prices may also take opening cues from any sharp movement in US Treasury yields or crude oil prices. 

 

However, profit booking is likely to keep gains in check. Any further weakness in the Indian rupee, which slumped 1.4% against the US dollar today, may also dampen sentiment. 

 

A weaker rupee eats into the returns that foreign investors earn on Indian assets, making these investments less lucrative. However, bond traders may take comfort from the fact that overseas investors bought Indian government bonds worth 15.25 bln rupees today despite the sharp fall in the rupee.

 

Yield on the 10-year benchmark 7.26%, 2029 paper is seen in a band of 6.48-6.55%, against today's closing level of 6.52%.

 

SECURITYTUESDAYFRIDAY
PriceYieldPriceYield

6.84%, 2022

102.4000

6.0212%

7.32%, 2024

104.3050

6.1851%

104.0400

6.2438%

7.17%, 2028

103.3400

6.6402%

103.1500 

6.6698%

7.26%, 2029105.12006.5190%104.81506.5619%

 


India Gilts: Pare gains on profit booking, caution over govt finances

 

 1500 IST  PRICE HIGH  PRICE LOW       OPEN    PREVIOUS
7.26%, 2029
PRICE (rupees)105.13105.48105.00105.35104.82
YTM (%)      6.51736.46886.53586.48696.5619

 

 

NEW DELHI–-1500 IST–-Government bonds pared some gains because traders booked profits on view that prices may not rise significantly in the near term, given the concerns over the government's strained finances and the possibility of fiscal measures to revive economic growth, dealers said. 

 

Traders were cautious over the government's next move to revive the trudging domestic economic growth, which had fallen to a 25-quarter low of 5.0% in Apr-Jun, according to data released after market hours on Friday. The data print was sharply below a Cogencis poll estimate of 5.6%. 

 

Even as weak economic growth backs the case for a further cut in interest rates, the sharp extent of the current slowdown might prompt the government to chip in with fiscal measures as well.

 

Earlier today, bond prices had risen sharply on view that the Reserve Bank of India would ease its monetary policy further to salvage growth. 

 

"After the GDP data, a fresh stimulus can be expected and that is weighing on prices," a dealer with a state-owned bank said. "There is uncertainty over how the RBI surplus transfer will be used because the government has not said anything on it."

 

The central bank will transfer a total of 1.48 trln rupees to the government this year, including 526.37 bln rupees of excess contingent reserve buffers. The government had budgeted 900 bln rupees as surplus transfer from the RBI for 2019-20 (Apr-Mar). Market participants expect the additional funds to make up for the shortfall in revenue due to slowing economic growth.

 

"It has become tricky because of the fiscal worries because on one hand tax revenues are falling short and then the GDP is also falling sharply so some spending can be expected," a dealer with a private bank said. 

 

Fiscal slippage might prompt the government to upwardly revise its market borrowing, which would entail an additional supply of bonds.

 

Bond prices were also said to have been weighed by sharp fall in the Indian unit, which has weakened over 1% against the US dollar today.


Yield on the 10-year benchmark 7.26%, 2029 paper is seen in a band of 6.50-6.55% for the rest of the day, dealers said. (Suyash Pande)


India Gilts: Up as GDP slump boosts rate cut hope; weak rupee weighs

 

 0930 IST  PRICE HIGH  PRICE LOW       OPEN    PREVIOUS
7.26%, 2029
PRICE (rupees)105.21105.48105.18105.35104.82
YTM (%)      6.50646.46886.51066.48696.5619

 

NEW DELHI–-0930 IST–-Government bonds rose sharply because the slump in India's GDP growth in Apr-Jun strengthened expectation of the Reserve Bank of India lowering interest rates, dealers said.

 

Data released after trading hours on Friday showed that GDP grew at 5.0% in the June quarter, the slowest pace in 25 quarters. Money markets were shut on Monday for Ganesh Chaturthi.

 

GDP had grown 5.8% in Jan-Mar and 8.0% in Apr-Jun last year. The Apr-Jun GDP number was much below the 5.6% estimated by a Cogencis poll of 22 economists.

 

With Consumer Price Index-based inflation remaining well below the RBI's medium-term target of 4.00%, the latest GDP data may prompt the central bank to lower interest rates as soon as its next monetary policy review in early October. So far in 2019, the RBI has lowered the repo rate by a cumulative 110 basis points, marking the longest spell of monetary policy easing since 2015.

 

"The Apr-Jun GDP figure is far lower than market expectations and to that extent, an October rate cut is now a done deal," a dealer with a primary dealership said. "Before

the data, most traders were doubting whether there would be five successive rate cuts, but with such a growth slowdown there is little option for the central bank but to cut," he said.

 

Even as bonds were up, the rupee's weakness versus the US dollar capped the gains, dealers said. The rupee was last at 72.0675 per dollar, around 0.9% weaker than previous close.

 

The domestic currency's weakness led to speculation of foreign portfolio investors unwinding their investments in Indian sovereign debt. A weak rupee eats into FPIs' gains from Indian debt, reducing the appeal of these investments.

 

Heavy profit booking, likely by state-owned banks, also kept gains in check. Once yield on the 10-year benchmark 7.26%, 2029 paper fell below the psychologically significant 6.50% level, state-owned banks were said to have aggressively locked in trading gains. These banks, which are among the largest holders of bonds, typically sell when prices rise thereby setting a floor for yields.

 

Later in the day, gilts could take cues from the result of today's state bond auction where 14 states have offered to raise 182 bln rupees.

 

Yield on the 10-year benchmark 7.26%, 2029 paper is seen in a band of 6.50-6.53% for the rest of the day, dealers said. (Suyash Pande and Vaibhav Chakraborty)


India Gilts: Seen sharply up as GDP slump strengthens rate cut hope

 

NEW DELHI – Government bonds are likely to open sharply higher today because the slump in India's GDP growth in Apr-Jun strengthens the case for the Reserve Bank of India to lower interest rates over the near term.

 

Data released after trading hours on Friday showed that GDP grew at 5.0% in the June quarter, the slowest pace in 25 quarters. GDP had grown 5.8% in Jan-Mar and 8.0% in Apr-Jun last year. The Apr-Jun GDP number was well below the 5.6% estimated by a Cogencis poll of 22 economists. Money markets were shut on Monday for Ganesh Chaturthi.

 

With Consumer Price Index-based inflation remaining well below the RBI's medium-term target of 4.00%, the latest GDP data may prompt the central bank to lower interest rates as soon as its next monetary policy review in early October. So far in 2019, the RBI has lowered the repo rate by a cumulative 110 basis points, marking the longest spell of monetary policy easing since 2015.

 

Moreover, with the government recently indicating that it was not in favour of announcing fiscal stimulus to rev up the economy, bond traders are likely to bet on monetary policy doing the heavy lifting as far as growth is concerned.

 

Last month, Chief Economic Adviser K.V. Subramanian said the Centre cannot intervene and use tax payers' money every time there is a weakness in certain sectors.

 

Over the last couple of weeks, the Centre has announced a slew of measures to boost the slowing economy, but refrained from announcing any fresh spending measures that could lead to a deviation from the fiscal consolidation roadmap. The steps the government has announced include mergers of several state-owned banks and the rollback of a contentious enhanced surcharge on capital gains from equity investments.

 

For the bond market, a spending push by the Centre –- which could lead to a potential fiscal slippage –- brings with it the dreaded possibility of an increase in market borrowing. Given that the Centre is scheduled to sell 7.10 trln rupees worth of bonds on a gross basis this year, any additional supply of dated securities would be difficult for the market to absorb.

 

Today, yield on the 10-year benchmark 7.26%, 2029 paper is seen in a band of 6.44-6.50% as against 6.56% at close on Friday. (Suyash Pande and Bhaskar Dutta)  End

 

US$1 = 72.40 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Arshad Hussain

 

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This copy was first published on the Cogencis WorkStation

© Cogencis Information Services Ltd. 2019. All rights reserved.

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