Bond prices in India fall for the second consecutive week, with a 10-year bond experiencing a decrease, following the Monetary Policy Committee's (Fed) decision.
The Reserve Bank of India (RBI) has urged states to release their bond issuance calendar around the same time as the central government, and to spread their borrowings across various tenures instead of focusing primarily on long-term bonds. This call comes amidst a rise in the yield on the 10-year benchmark Indian government bond, which climbed 2 basis points last week and ended at 6.4885% on the week.
In a move to stabilise the domestic bond market, the RBI has also received suggestions to reduce the share of ultra-long bonds in the overall supply. Locally, the market remains concerned about constant supply from the centre and states, with traders eagerly awaiting the borrowing calendar from both the centre and states for the second half of the fiscal year.
Meanwhile, the Federal Reserve has taken action to control inflation, reducing interest rates by 25 basis points. However, Chair Jerome Powell indicated that the Fed will be in a "meeting-by-meeting situation" regarding the rate cut outlook, and that 50 basis points of more cuts could be expected in 2025.
Gaura Sen Gupta, the chief economist at IDFC First Bank, has commented that the rate cut cycle may not be that deep. India's overnight index swaps were mixed, with the shorter end remaining little changed. The one-year OIS rate was at 5.45%, the two-year OIS rate was at 5.42%, and the liquid five-year OIS rate ended at 5.71%.
Yields move inversely to prices, meaning that when prices fall, yields rise. This relationship is important to understand when considering the impact of the RBI's and the Federal Reserve's actions on the stock market today. The RBI's efforts to stabilise the domestic bond market and the Federal Reserve's actions to control inflation will have a significant impact on yields and prices in the coming months.
The state bond issuance calendar for the October-December quarter gains significance in this context. The central bank has also asked states to communicate their fundraising plans more precisely, in an effort to provide greater transparency and stability to the stock market today. As the situation unfolds, it will be interesting to see how the domestic and international stock markets respond to these developments.
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