Bonds rally as weak GDP spurs rate cut bets

The rupee hit the year’s lowest level and stocks declined on concerns that foreign funds may continue to head for the exits amid the slump in economic growth. Sovereign bonds rose as the weak data bolstered bets for deeper interest-rate cuts.

The rupee weakened as much as 1.2%, with the stronger dollar and a lack of progress on the U.S.-China trade talks also weighing on the currency. The S&P BSE Sensex slid 1.1% after completing its longest run of monthly losses in three years on Friday.

“A few negatives are weighing on the rupee -- not only the GDP data but also a move higher in USD/CNH and weaker equities,” said Dushyant Padmanabhan, a forex strategist at Nomura Holdings Inc. in Singapore. The bank remains negative on the currency in the near term.


Gross domestic product growth cooled for a fifth quarter to 5% in the three months ended June, the slowest pace since March 2013 and lower than all the forecasts in a Bloomberg survey of economists, a report after trading hours Friday showed. The nation’s markets were shut on Monday.

The weakness comes at a time when the government has little fiscal room to boost the economy with tax revenues lagging estimates. Even a record $24 billion payout by the central bank to federal coffers last week failed to excite markets -- foreign funds pulled $2.3 billion from local shares in August, the biggest outflow since October.

While the weak economic data hurt stocks, it bolstered wagers for further easing by the Reserve Bank of India. The yield on the benchmark 10-year note fell four basis points to 6.52% in Mumbai. Yields have dropped more than 100 basis points from the year’s peak as the central bank cut rates four times in an attempt to spur growth.

Another 50 basis points of cuts may be in the offing, according to a revised forecast by Goldman Sachs Group Inc.

“Expect government bonds to rally on renewed expectations of monetary easing,” said Nagaraj Kulkarni, senior Asia rates strategist at Standard Chartered Plc in Singapore. “GDP has significantly undershot consensus expectations.”

Data released since the GDP print suggest the slowdown persists. India’s manufacturing purchasing managers’ index slipped in August from a month ago, while collections from the goods and services tax also eased.

”In the short term, the news about GDP numbers being lower in the first quarter -- albeit on a high base -- and the weak auto numbers will continue to weigh on the market,” said Ajay Bodke, chief executive officer of Prabhudas Lilladher Portfolio Management Services in Mumbai.