The 10-year bond yield fell below the 7 percent mark for the first time in 18 months and are trading at 6.95 following the lower-than- expected Q4 GDP reading. The market is widely expecting a rate cut on June 6 from the RBI as also a promise of more liquidity.
Any low growth number is good for bond markets because the understanding will be that not many people want to borrow money and therefore the cost of money will fall and that’s what happened. The Q4 GDP number has come at a 5 handle – that was not expected and that has been reiterated, emphasised by the auto sales number in May indicating that Q1 number of FY20 also will be poor and therefore there isn’t so much demand for money, which is why the price of money falls.
However, more than that the expectation moves to what the RBI will do. There is a camp that is now moving towards 50 bps as well, but CNBCTV18’s Citizen’s Monetary Policy Committee has voted unanimously for 25 bps cut plus the liquidity situation has already moved into a little bit of surplus. Instead of banks borrowing from RBI, net-net all the repo and reverse repo transactions, the RBI actually is taking money from banks today. A net Rs 2,000 crore has been taken in the reverse repo indicating that liquidity conditions have become fairly benign.
The big reason for a fall in yields is because global yields have fallen and they have fallen on the back of lower crude prices. That is the single biggest input into India’s inflation if crude prices fall to $60-61 per barrel. That also means inflation reading for future months is likely to be revised lower, both by economists and the RBI.
Therefore, not one but there are ten reasons why bond yields have to fall and they have fallen.