MUMBAI: A dovish commentary and downward revision to economic forecasts by the Reserve Bank of India could drive a continued fall in government bond yields and overnight index swap rates, even without an actual rate cut, treasury officials said on Tuesday.
The RBI is set to announce its policy decision on Wednesday, where most economists expect the central bank to hold rates steady but calls for a cut have grown louder in recent days.
“A dovish pause will be better and more positive for markets in the long term than a hawkish rate cut like the one in June,” PNB Gilts senior executive vice-president Vijay Sharma said.
“The chances of the 10-year bond yield reaching 6.20% are better with a pause than with a cut.”
In June, the RBI surprised markets with a 50-basis-point rate cut but shifted its stance to neutral from accommodative, and signalled limited room for further easing. Bond yields and swap rates rose following the decision, as traders interpreted it as the end of the rate-cutting cycle.
The 10-year benchmark bond yield rose on June 6 and has climbed nearly 20 bps since, while the five-year OIS rate rose by as much as 16 bps.
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“The RBI did a lot in the last policy, so it would rather wait to see the impact and another rate cut is unlikely. Also, a cut now may not have the desired impact,” said Alok Singh, group head of treasury at CSB Bank.
Barclays expects a dovish pause along with a 30–40 bps reduction in the RBI’s inflation forecast of 3.7% for this fiscal year.
Still, expectations for easing have strengthened after the U.S. slapped a 25% tariff on goods from India, which could weigh on growth.
“We believe there are enough reasons for the RBI to deviate from its previous guidance, deliver a further 25 bps easing in August, and adopt a more open-ended approach to future rate cuts,” Emkay Global economist Madhavi Arora said.
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