Although the RBI maintained status quo on policy rates in line with market expectations, the absence of liquidity easing measures and uncertainty over the timing of the next rate cut disappointed the market. In response to the policy announcement, the benchmark 10Y Indian government bond (IGB) yield and 5Y OIS rate rose 4bps and 7bps, respectively. The OIS curve bear flattened by 3bps. It is likely to maintain a Positive outlook on IGBs and recommend that investors buy 10Y IGBs. The stance is underpinned by the expectation of another 25bps policy rate cut during Q2-2015. Expectation of a subsequent 25bps policy rate cut has become more uncertain, however. To reflect this uncertainty, the target is fine-tuned for the long 10Y IGB trade recommendation and revised it to 7.50%, from 7.40% (entry: 8.08%, current: 7.77%; revised stop-loss: 8.00%). Standard Chartered says they do not think that the RBI’s monetary policy easing cycle is over yet. Given the favourable CPI inflation dynamics until August 2015 (RBI estimate: c.4% y/y), they see room for the RBI to ease policy rates by at least 25bps. The 10Y IGB yield is currently trading c.27bps higher than the repo rate and is yet to price in further monetary easing, in their view. “We expect the markets to build up rate cut expectations closer to the June policy announcement, and remain range-bound until then. The near-term supply dynamics appear mixed. The planned net issuance in May is INR 771bn (versus April’s INR 480bn), which is likely to exert supply pressure on IGBs”, Says Standard CharteredHowever, June is a month of favourable supply dynamics, with IGB redemptions exceeding the planned issuance by INR 82bn – this should cap a significant rise in IGB yields.
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