The 10-year benchmark Government security (G-Sec) rose 31 paise on Monday on the hope that Reserve Bank of India (RBI) may reduce repo rate in the coming June policy after the Finance Minister Arun Jaitley said he was expecting RBI to cut rate, and also as the retail inflation eased in April.
The benchmark 8.40 per cent-2024 bond closed at Rs.103.2175 or at a yield of 7.8981 per cent on Monday against Friday’s close of Rs.102.90 or 7.9465 per cent.
“Market is looking at a rate cut in June after the Finance Minister said he expects RBI to cut rate,” said a dealer with a state-owned bank.
In an interview to the PTI, Mr. Jaitley had said that his ‘expectation’ from RBI Governor Raghuram Rajan was the same as general expectation of interest rate cut.
“My expectation is the same as your expectation,” he said when asked about what he expected the RBI to do in the June 2 policy review.
The Reserve Bank of India has cut repo rate, currently 7.5 per cent, twice in 2015 so far.
In a note on Monday, Bank of America Merrill Lynch said “We expect Governor Rajan to cut 25 basis points on June 2, pause to allow markets price in the Fed rate hike expected in September and then cut 50 basis points in early 2016.”
Market participants said view on a rate cut during the second bi-monthly monetary policy review to be held on June 2 has also been strengthened by ease in retail inflation in April.
“I think this (rise in 10-year bond price today) is a late reaction to the Consumer Price Index (CPI) inflation data. There is an increased possibility of a 25 basis points rate cut next month,” said Harihar Krishnamoorthy, Treasurer at FirstRand Bank.
Retail inflation measured by CPI eased to 4.87 per cent in April from the revised number of 5.25 per cent in March.
The 10-year bond price also rose or yield eased after fiscal deficit for 2014-15 narrowed more than the estimate.
Fiscal deficit for 2014-15 stood at 4 per cent of GDP or Rs.5,01,880 crore against a target set at 4.1 per cent for the previous fiscal.
Bankers said the government’s move to hike petrol and diesel prices will help in containing fiscal deficit. “With hike in petrol, prices fiscal deficit will be in control even if it may lead to acceleration in inflation,” Mr. Krishnamoorthy said.
