Rupee Tumbles With Bonds as RBI Disappoints With Neutral Stance


© Bloomberg. An employee counts Indian rupee banknotes at a Walmart Inc. Best Price Modern Wholesale store in Hyderabad, India, on Saturday, March 16, 2019. Walmart is making friends in India with the kind of competitors that it spent decades putting out of business in the U.S. — mom and pop stores. These unlikely allies are part of the retailer’s latest attempt to crack the country’s giant consumer market, taking on e-commerce arch-rival Amazon.com Inc. and Asia’s richest man, Mukesh Ambani. Photographer: Dhiraj Singh/Bloomberg

(Bloomberg) — The Indian rupee tumbled the most in three months and bonds slumped after the central bank delivered its widely anticipated second rate cut of the year, but refrained from shifting to a more easy stance on monetary policy.

The fell as much as 1 percent, the most since Jan. 2, to 69.1338 per dollar in Mumbai as the Reserve Bank of India lowered the repurchase rate by 25 basis points, a decision predicted by all but two of the 47 economists in a Bloomberg survey. The six-member rate-setting panel voted 5-1 to retain the neutral stance. The yield on most-traded 2028 bonds jumped seven basis points to 7.48 percent.

“The market got what was already priced in and at least a change in stance would have given clarity on further rate cuts,” said Vijay Sharma, the New-Delhi based executive vice president for fixed-income at PNB Gilts Ltd. The absence of liquidity-enhancing measures also dented sentiment, he said.

Banking system liquidity has been in deficit since early February, with the shortfall staying above 500 billion rupees each day this week. The RBI early this week said it would repeat a $5 billion forex swap in April after the success of the first round last month. The authority injected about 3 trillion rupees in the fiscal year that ended March through its open-market bond purchases.

Weak Growth

The central bank will use all tools, including open-market purchases, to add liquidity as needed, Governor Shaktikanta Das said at briefing in Mumbai, without providing details.

While the RBI cut its inflation forecasts further, it also sees lower economic expansion of 7.2 percent for the year that began on April 1, down from 7.4 percent previously, amid signs of weakening local investment activity and waning global demand.

“Absent a significant hit to growth from here on, I think the RBI’s easing cycle is at its end and the next move in rates will be higher,” said Prakash Sakpal, an Asia economist at ING Groep (AS:) in Singapore. The lower inflation forecast for the first half of the fiscal year “is a bit optimistic” given that the period of easing price pressures is behind, he said. Sakpal said he expects a 25-basis point hike early next year when inflation crosses the 5-percent mark.

Here are more voices from strategists:

ICICI Securities Primary Dealership (Naveen Singh, head of treasury)

  • Lack of consensus in decision to cut rates “means over-bullishness about series of rate cuts are unrealistic and dissenting members will keep pressure to go slow”

Australia & New Zealand Banking Group (Khoon Goh, head of Asia research)

  • As markets had already priced in a rate cut, the overall tone from the RBI needed to be more dovish for Indian asset prices to continue rallying

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