Yields to move towards 7.25%

A disappointing week for those following global markets, especially trade war-related developments. In recent weeks, markets have been boosted by hopes that the US and China will reach at least a partial deal but those hopes faded after news poured in that the US and Chinese presidents are not likely to meet during Trump's Asia visit later this month.

Global equities sold off in response to this continuing trade stalemate and also as evidence mounts of slowing growth. The US yields and crude prices dropped and volatility rose. India's central bank stunned markets with a repo cut in addition to the widely expected reversal of stance to neutral.In other markets, euro-zone policy makers slashed growth forecast lower sharply to 1.3% for 2019, almost 60 bases lower than initial forecasts.

In the UK, Brexit continues to be the culprit to affect growth as Bank of England's governor sounds alarmed that his country will fall into recession if a no-deal scenario were to emerge as the final outcome. To sum up, the rally in risky assets so far this year appear to have been front-run by cyclical as the Federal Reserve veers towards a more dovish stance. Even that could suffer a jolt if the impasse over trade talks continues longer.

The week that went by entirely belonged to the Indian markets as the Reserve Bank of India's (RBI) rate-setting committee, the MPC, announced a rate cut and shifted to neutral policy stance, from a two-policy old 'calibrated tightening' stance. While this betrays the perceived strength in the economic growth and strong data, this move is to be seen beyond its preemptiveness. With the US turning dovish, Europe and UK slashing growth and China coming up with large easing measures, the RBI couldn't have found a better opportunity to reverse its tightening course.

The decision to cut rates was voted by a four-two majority and the decision to change the policy stance to neutral was unanimous. The committee also lowered inflation forecasts for FY 2019 markedly, and now estimates the annual average to be around 3.3%. This appears to be an extremely optimistic estimate and therefore paves way for another rate cut in the times ahead, maybe in calendar 2019 itself. Redefining bulk deposits (should help improve lower deposit costs), opening up ECB channel and doing away with FPI cap on corporate bonds and linking loan pricing to the rating of NBFCs are welcome measures and could avoid an industry-wide funding crisis.

Market participants appear to take the positivity of these measures with chagrin as bond yields haven't fallen much. It could probably be supplied concerns ahead once the open market operation (OMO) plan tapers by end of March. With an election around, overseas investors would wait and watch the developments. A bond rally should be a logical result of the current policy guidance and the intent of the committee.The benchmark 10-year (old one) should move towards 7.25% and the new one should set sight sub 7.10%. The three to five-year segment should rally most in the coming days as there appears to be more room for compression of spreads with a somewhat guaranteed liquidity in the system.

RALLY AHEAD

• Market participants appear to take the positivity of the measures with chagrin as bond yields haven't fallen much
   
• The three to five-year segment should rally most in the coming days

The writer is a market expert