RBI frontloads rate cuts: DBS Research

RBI frontloads rate cuts:

Our bullish INgov bonds call played out as the Reverse Bank of India (RBI) cut policy rates by 50bps yesterday (consensus: 25bps rate cut). We had argued that current wide spreads between USD and INR market rates are not warranted (see 'IN: RBI - another window opens', 22 Sep 15) With inflation held down by depressed commodity prices and Fed normalization in question amid global growth concerns, there is clearly scope for looser monetary policy. In response to the rates cuts, 2Y and 10Y INgov yields fell by 19bps and 12bps respectively. INgov yields are at levels not seen since 1H13, prior to the taper tantrums.

We continue to like INgov bonds. The market is likely to factor in the prob­ability of further rate cuts (keeping yields low) whether or not the RBI con­tinues to ease. In total return terms, we think that INgov bonds are likely to continue out­performing. When the Fed finally embarks on normalization, some upward pressure on INgov yields is prob­ably inevitable. How­ever, with spreads of INR rates over USD rates still wide, any yield increase in IN­gov bonds is likely to prove modest. This view is contingent on stable inflation amid a period where com­modity prices stay low.

Source : Equity Bulls

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