Informist, Wednesday, Oct. 9, 2024
By Aaryan Khanna
MUMBAI – The Reserve Bank of India's Monetary Policy Committee finally let go of a stance considered dated by many a gilt trader, changing it to neutral Wednesday. The immediate market reaction was positive, but traders were still left to figure out when and by how much the new rate-setting panel would be ready to cut rates.
At the conclusion of its three-day meeting, the MPC unanimously voted to change the policy stance to 'neutral' from 'withdrawal of accommodation', a stance it had held since June 2022, early in the rate-hike cycle. The repo rate was maintained at 6.50% for the tenth straight policy meeting.
RBI Governor Shaktikanta Das said the 'withdrawal of accommodation' stance had served the MPC well, but there was no justification to continue with it. Bond traders said the action was practical, and aligned the direction of India's monetary policy with major global central banks. In September, the US Federal Open Market Committee had cut interest rates by a higher-than-expected 50 basis points to kick off its rate-easing cycle. However, the MPC's change of stance did little more than reinstate expectations of a rate cut, which had fizzled due to the ongoing geopolitical turmoil in West Asia.
"The stance change was expected by the market, but some scepticism had crept in due to the geopolitical conflict in West Asia and China's fiscal stimulus," Ashhish Vaidya, managing director and country treasurer at DBS Bank India, said. "This seems to be in line with a global reversal of monetary policy to normal levels."
Bets on a stance change, widespread in the market at the beginning of October, evaporated after Brent crude shot up by over 10% last week. Iran launched a missile barrage at Israel last week after its attacks on Hezbollah in Lebanon, raising fears of a regional war and destruction or disruption of crude oil supply. After the policy statement, however, bonds made up for most of those losses. The 10-year gilt yield ended 4 basis points lower at 6.77% on Wednesday.
Traders considered the 'neutral' stance more a case of the MPC catching up with the RBI's actions over the past two months. The weighted average call rate--the operating target of monetary policy--has often drifted below the repo rate in August and September, helped by easy liquidity conditions in the banking system. While the RBI may allow this to sustain after the stance change, there is no expectation of a sharp fall in overnight rates when policy is at "neutral". And so, traders would be forgiven if they were to ask: "So what changes for us?"
"The spread between the repo (rate) and the 10-year bond has now compressed to 25 bps," Madhavi Arora, chief economist at Emkay Global Financial Services, said. "Any further rally would be capped till we actually see a commencement of the secular rate cut cycle."
Governor Das reiterated that monetary policy still aims to align CPI inflation with the RBI's 4% target, and said the change in stance was not a policy pivot. RBI officials said they were now more optimistic about achieving their inflation aim, but the central bank kept its CPI and GDP growth projections for 2024-25 (Apr-Mar) unchanged. Barclays economist Shreya Sodhani called this a move to ward off calls for a rate cut.
Even the most optimistic traders were hard-pressed to say whether the stance change with its attendant policy commentary hinted that rate cuts would begin at the next policy review in December. Bond yields had broadly priced in two rate cuts amounting to 50 bps over the next six months even before the stance was eased, and further moves were unlikely until these cuts materialised. Whether the RBI would elect to fulfil the market's hope of December and February rate cuts still seems reliant on inflation or growth surprising on the downside, dealers said.
"Any further moves in bonds based on just rate expectations seem unlikely unless the terminal rate expectations change," said Dwijendra Srivastava, chief investment officer - debt at Sundaram Asset Management Co., said. "The one-year (overnight indexed swap rate) is already pricing in a 5.70% (repo) rate. So we could have the move once the MPC actually cuts, provided the market does not run ahead of itself."
Even so, the MPC's action may have opened up a greater downside in bond yields, with more certainty that the RBI will allow banking system liquidity to remain in surplus. But that move in yields may be propelled by demand-supply dynamics rather than more aggressive pricing of rate cuts beyond the 50 bps priced in, dealers said.
The 10-year gilt grazed the 6.71% level in late September, the lowest in FY25, on hopes of a cut in the government's gross market borrowing. While that failed to materialise, higher foreign portfolio investor demand could overwhelm gilt supply if the easing of global monetary policy continues, dealers said. The last major index provider to not include India's bonds in its indices, FTSE Russell, on Wednesday said it would add fully accessible route gilts to its emerging market bond index starting September. FPIs have already bought over INR 700 billion, or about $8.5 billion, worth of index-eligible bonds in the current financial year.
The consensus view is that most of the fall in yields in FY25 is done, and risk premia may rise in the near term until geopolitical tensions recede. The 10-year gilt had hit a high of 7.20% in April, and may trade between 6.55% and 6.85% until the end of the financial year, dealers said. It is at 6.77% currently. Vaidya targets a move to 6.50% by the end of December, but his view remains an outlier.
With the October monetary policy outcome out of the way, India checked off one box on policy easing. But, ultimately, what traders took away was that India's policy rates are not certain to fall in a hurry, and so neither can bond yields. End
US$1 = INR 83.96
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
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