The Reserve Bank of India's unexpected purchase of government bonds pushed down bond yields on Monday and raised bets for a cut in interest rates in February, investors said.
The central bank's bond purchases accompanied daily overnight repo auctions. Both operations boost the quantity of money in the banking system.
WHY IT'S IMPORTANT
The fund infusion indicates the RBI wants to ease banking liquidity and bring down market rates, which could be a precursor to interest rate cuts, which are not as effective when liquidity is tight, traders said.
Recent changes in the composition of the RBI's rate-setting panel have already boosted hopes the central bank will prioritize supporting growth, which is projected to slow to a four-year low in 2024-25.
BY THE NUMBERS
The RBI net bought bonds worth 101.75 billion rupees ($1.18 billion) in the week to Jan. 17, its first such bond purchase in over three years.
MARKET REACTION
The 10-year bond yield briefly dropped to its lowest in nearly three years and was at 6.67%, just 17 basis points above the key policy repo rate of 6.50%. GRAPHIC
KEY QUOTES
"The market would increasingly start pricing in a rate cut based on a couple of factors like lower inflation in the coming months, lower growth forecast, adherence to fiscal consolidation in the budget. We can also expect RBI to change the stance to accommodative to fix the growing liquidity deficit," said Alok Sharma, head of treasury at ICBC.
"We expect the RBI to cut the repo rate by 25bp to 6.25% in the February MPC... and take steps to inject durable liquidity, by considering another reduction in CRR (cash reserve ratio) of 50bp, or substantial bond purchases through open market operations," said Rahul Bajoria, head of India and ASEAN economic research, BofA Global Research. ($1 = 86.3760 Indian rupees)
