Strong Economic Data Shakes Bond Market
Indian government bonds experienced significant pressure on the final trading day of the month as surprisingly robust economic growth figures cast uncertainty over the Reserve Bank of India's potential interest rate reduction next week.
The benchmark 10-year bond yield closed at 6.5463% on Friday, marking a noticeable increase from the previous session's closing of 6.5082%. This movement reflects the inverse relationship between bond yields and their prices, indicating declining bond values as yields climb.
What Drove the Market Reaction?
The bond market's negative response stemmed from India's impressive economic performance during the July-September quarter. The economy expanded by 8.2% year-on-year, accelerating significantly from the 7.8% growth recorded in the preceding quarter. This growth substantially exceeded the 7.3% expansion forecast by Reuters economists.
This robust economic expansion was primarily fueled by vigorous consumer spending and strong manufacturing activity. The growth data arrived despite challenges in international trade, including additional punitive tariffs imposed by the United States on Indian exports.
Earlier expectations for a rate cut had been building due to record low inflation levels and recent dovish statements from RBI officials. However, the stronger-than-anticipated growth figures suggest that monetary policy easing might be postponed.
Diverging Views on RBI's Next Move
While the market generally reacted negatively to the reduced likelihood of immediate rate cuts, some economists maintain optimism about potential monetary easing. Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, expressed a contrasting viewpoint.
"Despite the high real GDP growth, we retain our expectations of a 25 basis point rate cut in the upcoming policy as inflation trajectory remains benign," Bhardwaj stated. She emphasized that single-digit nominal GDP growth continues to signal tepid underlying economic activity.
The RBI's policy decision is scheduled for December 5, and a majority of economists surveyed by Reuters still anticipate a rate cut despite the strong growth numbers.
In related market movements, India's overnight index swap rates also increased as the stronger growth data diminished prospects for immediate monetary easing. The one-year OIS concluded at 5.46%, while the two-year swap finished at 5.47%. The five-year rate settled at 5.76%.
