Bond markets rally as RBI cuts benchmark rate by 50 basis points

MUMBAI: Bond markets rallied as investors rushed to lap up debt securities after the Reserve Bank of India cut the benchmark rate by 50 basis points, higher than what markets had expected earlier.

The rupee recouped early losses with more overseas inflows coming into the domestic markets.

A basis point is 0.01%. An ET poll among market participants showed that markets were expecting 25 bps cut. The repo or benchmark rate now stands at 6.75% from 7.25% earlier.

The benchmark bond yield nosedived 15 basis points to 7.58% pushing prices up.

Moreover, the central bank has made additional space for foreign portfolio investors to buy government securities. Overseas investors have almost exhausted the investment limit set at $30 billion totally.

“It is a positive move by the governor. Given the backdrop of the weakening global economy, it is absolutely consistent to have arrive at these measures,” said Ashish Vaidya, executive director and head fixed income trading at DBS Bank.

“From gsec market point of view clearly the yields are headed lower. I expect the benchmark bond to trade in the region of 7.35-7.45 next two or three months.”

The rupee, which opened lower at 66.40 against the US dollar mirroring weakness in the global markets, recouped losses after the RBI’s policy measures to trade at 66.16.

“The hike in the FPI limit will be an added positive for the currency market. However, the carry between INR and USD is reducing,” Vaidya said.

“The exchange will eventually be a function of evolving economic fundamentals.”