India’s RBI keeps rates unchanged in dovish policy

Bonds in India gained and the rupee fell after the central bank held back on a widely expected hike in a key rate, continuing with its benign policy stance amid a hawkish turn by most global central banks.

The yield on five-year bonds fell 17 basis points to 6.20 per cent, while that on 10-year note declined by ten points to 6.70 per cent. The rupee fell as much as 0.4 per cent to 75.0687 against the dollar to be Asia’s worst-performing currency on Thursday. Stocks advanced.

That’s after the Reserve Bank of India kept the reverse repo rate, the rate at which it absorbs cash from banks, unchanged at 3.35 per cent, belying majority expectations of a hike. Bond traders still remains concerned about the government’s plan to sell a record Rs14.95 trillion ($200 billion) of bonds in the next fiscal year even as demand wanes.

“It’s more dovish than most people expected,” said Dhiraj Nim, economist and foreign exchange strategist at Australia & New Zealand Banking Group Ltd. “For bonds, some concerns remain as to how will a large borrowing programme be accommodated, on which the RBI was largely silent, especially with tighter liquidity conditions ahead both onshore and globally.”

The RBI separately lowered the inflation outlook to 4.5 per cent for next fiscal from 5.3 per cent seen this year, which allows it room to focus on growth.

Bonds sold off in recent weeks on concerns over higher debt supply and a hardening in yields as central banks globally act on inflationary concerns. India has charted a different path on policy normalisation seeing inflationary pressures as transitory. The 10-year bond yield is still up about 25 basis points this year.

Reserve Bank of India governor Shaktikanta Das said that the RBI will continue to focus on smooth completion of the government borrowing programme. “Market participants also have a stake in the orderly evolution of financial conditions and the yield curve. It is expected that market participants will engage responsibly and contribute to cooperative outcomes that benefit all.”

The RBI also increased a special limit for long-term foreign investors in Indian bonds by Rs1 trillion ($13.4 billion) to Rs2.5 trillion, Das said. Authorities will take a calibrated approach to India’s inclusion in global bond indexes, he said addressing a media conference.

New Delhi didn’t enable a widely expected tax scrap for foreigners in the budget which would have paved the way for India’s inclusion in global bond indexes.

“The dovishness of the policy has taken bond markets by surprise,” said Churchil Bhatt, executive vice president at Kotak Mahindra Life Insurance Co. Ltd. “While policy normalisation remains inevitable, the implied promise of a calibrated and guided approach by RBI, is likely to ensure an orderly evolution of yield curve in spite of a large government borrowing programme.”