By Dharamraj Dhutia
MUMBAI – The drop in India’s benchmark bond yields and swap rates signals the central bank may address weaker-than-expected economic growth by easing monetary policy, which, traders say, will likely be via a lower cash reserve ratio than by interest rate cuts.
WHY IT’S IMPORTANT
The Reserve Bank of India’s monetary policy decision is due on Friday but elevated inflation may prevent an immediate cut in policy rates, treasury officials said.
In that light, easier liquidity conditions will bring down market interest rates even without a direct policy rate cut.
Therefore, market participants expect the RBI to start easing liquidity via lowering the CRR, setting the stage for rate cuts from early 2025.
They are also not ruling out liquidity infusion through long-term repurchase auctions, dollar/rupee swaps and debt purchases.
CONTEXT
India’s economy grew a weaker-than-expected 5.4% in July-September due to weaker expansions in manufacturing and consumption, data showed on Friday.
And while the growth rate hit a seven-quarter low, inflation was above the central bank’s comfort range at 6.2% in October.
MARKET REACTION
Overnight index swap rates — the closest gauge of interest rate expectations — have slumped in response to the GDP data.
The one-year OIS rate was at 6.30%, down 21 basis points from Nov. 28, while the five-year rate was at 5.99%, down 18 bps.
Bond yields also eased, with the 10-year benchmark bond yield down 8 basis points to 6.72%.
KEY QUOTE
“There has been a build-up in momentum related to pricing in of a rate cut in the upcoming policy due to a lower-than-expected GDP growth,” said Alok Sharma, head of treasury at ICBC.
“We expect RBI to cut the CRR by 50 bps. That would address the tight liquidity and prep up the market for a 25 bps cut in February 2025.”
GRAPHIC
($1 = 84.6850 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Savio D’Souza)
