Bond prices for a 10-year period in India experience a decline for the second consecutive week, due to disappointment with the Federal Reserve.
India's central bank, the Reserve Bank of India (RBI), and its global counterparts like the US bank Federal Reserve and European Central Bank (ECB) have been making adjustments to their monetary policies, causing ripples in the financial markets.
In a recent move, the US bank Federal Reserve reduced interest rates by 25 basis points, signalling a continued effort to stimulate the US economy. This decision was followed by an indication of 50 basis points of more cuts in 2025. Across the Atlantic, the European Central Bank (ECB) proposed in September 20XX to reduce the shares of ultra-long-term bonds in the overall supply, aiming to manage yield levels.
Meanwhile, in India, the Reserve Bank of India (RBI) has been encouraging states to communicate their fundraising plans more precisely and spread their borrowings across tenures rather than focusing on long-term bonds. The central bank also suggested cutting weekly auction sizes to manage liquidity.
The RBI's efforts seem to have had a mixed impact on India's overnight index swaps. The shorter end remained little changed, while the longer end witnessed some uptick. The one-year OIS rate in India was at 5.45%, and the two-year OIS rate was at 5.42%. The liquid five-year OIS rate ended at 5.71%, and the one-year benchmark Indian government bond yield finished at 6.4885%.
The yield on the 10-year benchmark bond rose marginally on the week, climbing 2 basis points last week. However, locally, the market remains concerned about constant supply from the centre and states. The state bond issuance calendar for the October-December quarter gains significance, according to traders, who are also awaiting the borrowing calendar from the centre for the second half of the fiscal year.
Gaura Sen Gupta, chief economist at IDFC First Bank, has suggested that the rate cut cycle may not be that deep. Chair Jerome Powell of the US bank Federal Reserve echoed a similar sentiment, stating that the Fed will be in a 'meeting-by-meeting situation' regarding the rate cut outlook.
In terms of bond yields, yields move inversely to prices. Therefore, a rise in bond yields indicates a fall in bond prices, which could potentially impact the overall market sentiment. The yield on the 10-year benchmark bond climbed 2 basis points last week, but it remains to be seen how this trend will continue in the coming weeks.
As global central banks like the US bank Federal Reserve and European Central Bank (ECB) continue to adjust their monetary policies and local markets navigate through their own challenges, investors and traders will be closely watching developments to make informed decisions.
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