EFFECT OF RATE CUT ON BONDS

BE/RBINOTE/39/2019

• RBI has resorted to Rate cuts in the past. Also, there is a plan to issue of overseas bonds, which in other terms would reduce supply of bonds in India and thus impact their prices
• Also, the influence on the domestic yields is attributed to the falling bond yields globally, amid expectations of the US Federal Reserve adopting a dovish stance.

Results:

1. The yields on the Government bonds saw a sharp fall which was seen during the ban on high value currency notes in November 2016.
2. Also, the yield on the benchmark 10 Year bond came down by10 basis points to 6.33% which level was last seen in December 2016. Thus, till date the yield on bond prices have fallen by approximately 100 basis points.  Here one should understand that bond yields and prices move in opposite directions.
3. A Government report states that India’s core inflation stood at to 4.1%, which is its slowest in nearly two years, down from 4.23% in May.
4. The inflation rate for June was at 3.18% which was far below the RBI’s target of 4% for the last 11^th straight month which in turn may bring the output level to 3.1% from 3.4% in April. This is envisaged to result in a steady monetary position and further rate cuts when the monetary committee meets next during 6^th and 7^th August 2019.

Other Reasons for a Bond price fall:

•  Government proposes to raise a part of its borrowings from overseas markets which is expected to bring down the bonds supply in the domestic market and would subsequently have an impact on prices.
• Also, the Government’s lower fiscal deficit target of 3.3% from 3.4% announced in the interim budget has encouraged investors’ sentiments.
• Economists hope offshore borrowing would lower the pressure on domestic interest rates.
• Further, US Federal adopting a dovish stand also influenced the domestic yield on bonds.