Bond Markets to Search for Yields- RBI April 2019 Policy Review
RBI stayed dovish in its April 2019 policy review, lowering the Repo Rate by 25bps and also lowering inflation and growth forecast. The bond market had widely expected the rate cut and there was profit taking in bonds post the cut and 10 year benchmark government bond yields rose by 5bps post policy.
Going forward, the market may not build in expectations of more rate cuts, unless data on inflation and demand comes in worse than expected. However, low rates are likely to remain for a while and this coupled with liquidity infusion through USD/INR swaps and OMOs will prompt the bond market to look for yields across the yield curve and segments.
RBI highlighted the weakness in economic data coming out of the US, Eurozone and China and the fact that global central banks from Fed and ECB to Bank of Japan are turning cautious on inflation and growth and are likely to stay or turn dovish on policy. On the domestic front too, RBI highlighted weakness in high frequency growth factors such as IIP (Index of Industrial Production) and vehicle sales.
There are threats to inflation in the form of El-Nino and global oil prices but they are beyond RBI’s control and hence the central bank lowered the inflation forecasts.
On the liquidity front, RBI has announced a second long term USD/INR currency swap auction, scheduled for end April. The auction will infuse around Rs 375 billion of liquidity into the system. RBI will continue its policy of injecting durable liquidity into the system.
Government bond supply and SDL supply will keep government bond yields in check, as the market may not factor in more rate cuts and also remain neutral until the elections end in May. OIS yields have factored in this rate cut and may see profit taking.
Credit spreads are still attractive given that they have risen sharply since the IL&FS default in September and markets will look to buy into credit spreads.
INR will stay ranged until elections, as will the Sensex and Nifty, as they have risen sharply and are trading at higher levels.