Mumbai: Expectations of a deeper-and faster-rate-cut cycle and higher overseas demand triggered by easier regulatory norms sparked a rally in the bond market on Wednesday, with the yield on the benchmark 10-year paper closing below the psychologically crucial 6.30% level.
Yields of the 10-year benchmark government security closed at 6.28%, and softened five basis points below their previous close for the second consecutive day.
The capital market regulator Sebi on late Tuesday floated draft norms, suggesting easing registration and other compliance requirements for a new FPI category-those investing exclusively in Indian government bonds-termed IGB-FPIs. "The draft makes Indian debt more attractive for FPIs. The regulator wants to make things easier for FPIs with focus on operational issues such as KYC review. The KYC review process is different for RBI and Sebi, but this draft simplifies the procedure and also aligns with the RBI norms," said a senior trader at a foreign bank.
Consequently, the implementation of draft rules contributed to the rally observed on Wednesday.
"The draft norms by Sebi for easier KYC norms has played a role in the rally. Additionally, markets are now also pricing in a deeper rate cut cycle, expecting a terminal repo rate of 5.25%, so I think investors are frontloading on their positions" said Anshul Chandak, head of treasury at RBL Bank.
The markets started pricing in an additional 75 basis point rate cut, instead of an earlier 50 basis points. The optimism is because of India's retail inflation print for April. Data showed that CPI inflation remained below the central bank's 4% target for the third consecutive month at 3.16%, as food prices rose at a slower pace.
"We expect that the central bank may cut policy rates by at least 75 basis points in the rest of FY26. It will, of course, depend on the incoming data too," said Paras Jasrai, associate director at India Ratings. Barclays on the other hand has revised their expectations to a third consecutive cut in the June policy, from earlier expectations of August cut.
The Sebi's draft comes nearly a week after the Reserve Bank of India eased rules for FPI to buy local corporate bonds by lifting caps on short-term debt investment limits. This is expected to give FPIs flexibility on how much to invest and in which debt securities without worrying about breaching regulatory caps. On the other hand, the weekly treasury bill auction by the RBI saw stronger-than-expected demand, pushing down short-term yields by four basis points from the previous week. The cut-off yield for the 91-day bill was at 5.839%, while yield for 182 day and 364 day T-bill was 5.84%, and this yield was lower than expected, traders said.
Fall in bond yields as well as short-term rate is expected to result in cheaper borrowing for companies, especially non-bank lenders. Corporate bonds are priced at a spread over yields on G-Secs.
Yields of the 10-year benchmark government security closed at 6.28%, and softened five basis points below their previous close for the second consecutive day.
The capital market regulator Sebi on late Tuesday floated draft norms, suggesting easing registration and other compliance requirements for a new FPI category-those investing exclusively in Indian government bonds-termed IGB-FPIs. "The draft makes Indian debt more attractive for FPIs. The regulator wants to make things easier for FPIs with focus on operational issues such as KYC review. The KYC review process is different for RBI and Sebi, but this draft simplifies the procedure and also aligns with the RBI norms," said a senior trader at a foreign bank.
Consequently, the implementation of draft rules contributed to the rally observed on Wednesday.
"The draft norms by Sebi for easier KYC norms has played a role in the rally. Additionally, markets are now also pricing in a deeper rate cut cycle, expecting a terminal repo rate of 5.25%, so I think investors are frontloading on their positions" said Anshul Chandak, head of treasury at RBL Bank.
The markets started pricing in an additional 75 basis point rate cut, instead of an earlier 50 basis points. The optimism is because of India's retail inflation print for April. Data showed that CPI inflation remained below the central bank's 4% target for the third consecutive month at 3.16%, as food prices rose at a slower pace.
"We expect that the central bank may cut policy rates by at least 75 basis points in the rest of FY26. It will, of course, depend on the incoming data too," said Paras Jasrai, associate director at India Ratings. Barclays on the other hand has revised their expectations to a third consecutive cut in the June policy, from earlier expectations of August cut.
The Sebi's draft comes nearly a week after the Reserve Bank of India eased rules for FPI to buy local corporate bonds by lifting caps on short-term debt investment limits. This is expected to give FPIs flexibility on how much to invest and in which debt securities without worrying about breaching regulatory caps. On the other hand, the weekly treasury bill auction by the RBI saw stronger-than-expected demand, pushing down short-term yields by four basis points from the previous week. The cut-off yield for the 91-day bill was at 5.839%, while yield for 182 day and 364 day T-bill was 5.84%, and this yield was lower than expected, traders said.
Fall in bond yields as well as short-term rate is expected to result in cheaper borrowing for companies, especially non-bank lenders. Corporate bonds are priced at a spread over yields on G-Secs.
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