Indian 10-year bond yields dropped by 10 basis points after disappointing GDP growth data was released last week. This suggests that investors believe the Reserve Bank of India (RBI) might take steps to help the economy in its upcoming meeting on Friday. Recently, the GDP growth in India slowed down to just 5.4% for the July-September period, a level not seen in seven quarters.
Analysts think the RBI might lower the cash reserve ratio (CRR), which is currently set at 4.5%. This could potentially free up around Rs 1.1 trillion in the banking system. A reduction in CRR could encourage more investment in bonds and help stimulate economic activity. The gap between the 10-year bond yield and the RBI’s main interest rate has shrunk significantly, signaling that the bond market is expecting potential easing from the RBI.
Other indicators, like overnight index swaps (OIS) rates, have also decreased by 20 basis points since the weak GDP data came out. The RBI has maintained its policy rates at 6.5% since February 2023. While the central bank has previously been wary of inflation—particularly due to rising food prices—it has shown optimism about future growth thanks to good monsoon seasons and hopes for increased investments.
According to Suresh Darak, a financial expert, the latest economic data poses a dilemma for the RBI, balancing the need to support economic growth with the ongoing inflation challenges. He mentioned that it will be interesting to see how the RBI navigates this situation in its upcoming decision.
Interestingly, Nomura, a Japanese investment bank, expects the RBI to implement a full 1% rate cut starting this Friday. This contrasts with most predictions, which suggest the RBI will only cut rates by half of that amount. Nomura believes that even though food prices are rising, other price pressures remain calm, allowing the RBI to focus more on boosting growth.
The benchmark 10-year bond yield has dropped to a three-year low, and the gap with the repo rate has narrowed significantly, indicating that some form of easing might be on the horizon. Right now, the 10-year bond is priced at Rs 100.7350, with a yield of 6.6837%.
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