Bonds rally after RBI announces emergency rate cut

Sovereign bonds in India rallied after the central bank cut its benchmark policy rate in an emergency session as the economy reeled from the coronavirus outbreak.

The yield on the most-traded 2029 bonds fell 12 basis points to 5.91 per cent as of 11:30 am in Mumbai, while that on the new 10-year notes dropped seven basis points. The rupee weakened and stocks reversed gains to halt a three-day rally ahead of a long weekend.

The Reserve Bank of India slashed the benchmark repurchase rate by 40 basis points, offering more support for an economy headed for its first full-year contraction in more than four decades. Bond traders have been calling for more support with concern mounting over a surge in government borrowings.

Average yields on top-rated rupee-denominated corporate bonds maturing in 10 years fell 15-20 basis points on Friday, according to traders. The decline would be the most since May 8, according to data compiled by Bloomberg.

“The RBI cuts may not overwhelm the market and the rally may not last beyond a few days as the market was expecting a 50 basis point cut,” said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership. The market needs to see a bond purchase calender given the huge supply of debt, he said.

The rupee fell 0.2 per cent to 75.76 per dollar and the S&P BSE Sensex index slid 0.9 per cent, set for the second straight week of declines. A gauge of lenders declined 2.2 per cent to the lowest level in more than a month.

The central bank painted a bearish view of the economy, saying it expects Asia’s third-biggest economy to contract in the fiscal year through March 2021 as the impact of the coronavirus and measures taken to contain the pandemic wiped out consumption — the backbone of the economy.

“The RBI’s worries around economic growth are dragging the equities down,” said Sameer Kalra, an investment strategist at Mumbai-based Target Investing. “Rate cuts don’t matter as much as nobody wants take or give loans as confidence is lacking.”

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