Traders said a larger-than-expected contraction in GDP reported on Monday also aided sentiment for bonds.
Indian bond yields fell to their lowest level in over two weeks on Tuesday following the Reserve Bank of India’s (RBI) special open market operation (OMO) announcement, while the rupee rose to six-month highs.
The RBI on Monday announced new measures to maintain stability in the financial system during the coronavirus pandemic, including two more tranches of special OMOs in its ‘Operation Twist’ and some easing of held-to-maturity (HTM) limits for bond holdings by banks.
The benchmark 10-year bond yield dropped as much 20 basis points (bps) in opening trade and was down 16 basis points (bps) at 5.96 per cent at 10:42 am.
“Consistent operation twists and relaxation to the HTM limit should help in flattening the yield curve,” said Upasna Bhardwaj, economist at Kotak Mahindra Bank.
“However, the toolbox seems to be shrinking meaningfully. We expect the 10-year to range between 5.8-6.1 per cent given the RBI measures,” she added.
Traders said a larger-than-expected contraction in gross domestic product reported on Monday also aided sentiment for bonds as it revived hopes for more rate cuts by the RBI over the next few months.
India’s economy shrank 23.9 per cent in April-June, much more than forecast and pointing to a longer than previously expected recovery, with analysts calling for further stimulus.
The RBI in its statement also said the recent appreciation of the rupee is working towards containing imported inflationary pressures prompting traders to believe it may not be as aggressive in its dollar purchases as in recent months.
The partially convertible rupee was trading at 73.12/13 per dollar compared with 73.61 at previous close. It rose to a high of 73.09, its strongest since March 5.
Despite the statement from the RBI, DBS economists said intervention in the forex market is unlikely to be completely off the table.
“We expect reserve accumulation to be a priority for the policymakers, especially if strong flows destabilise FX markets, when inflationary pressures subside,” they wrote in a note.
