“We definitely expect softer language from the driven even as the possibility of a change in stance remains balanced,” said Pankaj Pathak, fixed income manager at Quantum Asset Management Co. “That may be the trigger for a drop in yields.”
The 10-year yield, which has fallen 34 basis points this year to 6.83%, could fall further to 6.25% in March, according to Nomura Holdings Inc., with First IDFC Bank predicting a drop to 6.50%. A continued decline may reduce borrowing costs for the government, which aims to reduce the budget deficit to its lowest level in five years this fiscal year.
Indian bonds are among Asia’s best performers this year thanks to more than $16 billion of foreign entries boosted by inclusion in the JPMorgan Chase & Co. Emerging Markets Index.Bonds have also rallied on bets that slowing economic growth and a 50 basis point rate cut by the U.S. Federal Reserve Last month may prompt the RBI to follow suit. Maintaining headline inflation below the RBI’s 4% target for two consecutive months has supported expectations of a dovish policy shift.
“The October meeting will be the first MPC meeting this year in which at least part of the market expects a rate cut or change of stance,” Barclays Plc economists including Shreya Sodhani wrote in a note. That “makes it a relatively exciting meeting,” he said.
Still, the RBI may act cautiously amid a resurgence in tensions in the Middle East, which lifted benchmark yields to near a one-month high on Friday. Governor Shaktikanta Das reminded markets in September that he was in no rush to reduce borrowing costs.
The RBI’s newly appointed monetary policy panel is expected to keep the policy rate unchanged at 6.50% for the 10th consecutive meeting, according to a majority in a Bloomberg survey of economists.
Analysts still support a tilt toward moderate policy. Rate swaps are pricing in around 70 basis points of rate cuts over the next 12 months with a good chance of a reduction in December, according to Nomura.
“The next stage of bond rally may be due to a moderate posture in the monetary policy and/or stronger foreign inflows,” said Nitin Agarwal, head of India operations at Australia and New Zealand Banking Group Ltd. If investors gain more confidence in the global soft landing, it will spur more capital inflows into emerging markets, including India, he said.
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