Bonds Drop Most in Two Months on India RBI’s Surprise Rate Pause

(Bloomberg) -- India’s sovereign bonds declined the most in more than two months after the central bank unexpectedly kept interest rates unchanged.

The yield on benchmark 10-year bonds rose 10 basis points to 6.56%, while the rupee edged higher after the Reserve Bank of India left the policy rate at 5.15% amid rising inflation expectations.

“This signals that RBI’s appetite for easing has nearly sapped as the aggressive easing earlier in the year bore no fruit,” said Prakash Sakpal, an economist at ING Groep NV economist in Singapore. “Still, we don’t think inflation is going to be any hurdle to further easing if needed.”

Five rate cuts this year, copious amounts of banking system liquidity and a dovish policy tilt have all failed to boost demand for credit. The RBI appears to have caught up with the reality that growth cannot be revived through rate action alone, and is now focusing its efforts on the pass through of previous reductions.

Temporary Pause

Last week’s data showing September-quarter growth declining to the lowest since 2013 boosted wagers for a sixth rate cut, with all 43 economists surveyed by Bloomberg expecting a reduction.

The pause is likely temporary, Sakpal said, adding the central bank isn’t done with monetary easing.

Benchmark 10-year bonds have traded in a narrow range since October amid fears the government will expand record bond sales to counter the weak growth print. Those concerns have countered the benefits from Asia’s most aggressive easing cycle and a financial system awash with more than $40 billion of excess liquidity.

“Looks like the central bank also has some concerns on further fiscal expansion” going by Thursday’s losses in bonds, said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership in Mumbai.

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