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Sovereign bonds rally as GDP shock puts easing bets back on table

LiveMint logoLiveMint 01-09-2017 Kartik Goyal

Mumbai: Indian sovereign bonds rallied the most since early July as data showing an unexpected slowdown in economic growth boosted speculation the central bank will cut interest rates further.

Gross domestic product (GDP) expanded 5.7% in the April-June quarter from a year earlier, an official report showed after the close of markets on Thursday. That was below the 6.5% median estimate in a Bloomberg survey of 45 economists and the 6.1% growth seen in the previous quarter.

The yield on government notes due May 2027 fell four basis points on Friday to 6.49%, set for its biggest drop since 10 July. It climbed six basis points in August, as a steeper-than-expected rebound in inflation reduced bets of more easing by the Reserve Bank of India (RBI) following a rate cut on 2 August. The rupee fell 0.1% to 63.97 per dollar in Mumbai.

“Rate-cut hopes, which had almost disappeared from the market, have been rekindled after the GDP data,” said Vijay Sharma, New Delhi-based executive vice-president for fixed income at PNB Gilts Ltd. “While the growth slowdown isn’t good for the economy, it is proving to be good for the bond market.”

India’s $2.3 trillion economy slowed as companies and retailers pared inventories of goods before the roll out of a nationwide sales tax, adding to the strain caused by Prime Minister Narendra Modi’s November cash ban.

Economic weakness should lead the market -- which expects flat rates until year-end and is pricing in only 40% chance of a 25-basis point rate cut by end-2018 -- to “at least price in fully a rate cut from the RBI,” Cristian Maggio, London-based head of emerging-markets research at TD Securities, wrote in a report.

Separately, a Bank of America Merrill Lynch note said the weak growth data supports its call for a 25-basis point RBI rate cut at the 6 December policy meeting. Bloomberg

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