Indian debt markets have priced in a 25 basis points rate cut by the Reserve Bank of India (RBI) at its April policy meeting or even sooner, but some economists remain circumspect and warn the rally in bond yields could prove premature.
The benchmark 10-year bond yield dropped as much as 13 basis points on Wednesday to 6.21 per cent before closing at 6.23 per cent, in the wake of the US Federal Reserve’s surprise cut, which raised expectations the RBI would follow suit.
The RBI eased rates by 135 basis points in 2019 before abruptly deciding to hold rates in December.
But, with interest rate transmission – the pace at which changes feed through to the wider economy – still stuttering and the RBI having deployed several unconventional measures to boost credit growth, economists believe another cut is far from a given, and warn it will do little to tackle growth concerns.
“I see very limited probability of a rate cut in April, as materially it will not make much difference,” said Rupa Rege Nitsure, chief economist at L&T Financial Holdings, noting that the RBI is already maintaining surplus liquidity in the system and influencing bond yields via various unconventional measures.
Overnight indexed swap rates are already pricing in a 40-50 bps reduction in the repo rate, while government bonds have priced in a 25 bps cut, traders said.
Markets will thus see a massive sell-off if the RBI fails to deliver on these expectations, they added.
“We may not see selling immediately, but if even after 5-7 days there is nothing from the RBI, it will be bad,” a senior trader at a private bank said.
The RBI has repeatedly said there is space for more rate cuts if inflation eases. The February reading, to be released later in the month, might prove critical.
The RBI’s Monetary Policy Committee has been leaning toward easing as soon as inflation comes off the boil, said DBS Bank economist Radhika Rao.
“With fresh risks, markets perceive that the step towards cuts might come sooner,” she added.
The RBI is considering using unconventional policy tools yet again to spur lending, three government officials told Reuters on Wednesday.
Economists said these measures were far more effective in reducing the cost of funds for banks and would do more to improve lending than outright rate cuts.
“One can say there is a 50 per cent or more than a 50 per cent likelihood that RBI may cut rates, but not 100 per cent certainty,” said Sameer Narang, chief economist at state-run Bank of Baroda.
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