Indian bond yields fell sharply on Wednesday morning as a surprise rate cut by the US Federal Reserve to limit the coronavirus impact raised expectations of a similar move back home.

US benchmark 10-year Treasury yields slid below 1 per cent for the first time on Tuesday, after the Fed slashed interest rates by half a percentage point in an out-of-turn move.

The benchmark 10-year Indian bond yield dropped 8 basis points (bps) to 6.26 per cent. The partially convertible rupee strengthened sharply to 72.90 per dollar from 73.29 at 1130 GMT on Tuesday, but gave up all gains to trade at 73.35 by 0512 GMT.

The RBI (Reserve Bank of India) will be watching closely, but may not really react quickly like the Fed. They may use other tools as well, in case it is required. But now, April cut is on the cards,” said Paresh Nayar, head of fixed income and forex at First Rand Bank.

The Indian central bank on Tuesday said it was monitoring global and domestic developments closely and continuously, and is ready to take appropriate actions to ensure orderly functioning of financial markets, maintain market confidence and preserve financial stability.

In an interview to Bloomberg , RBI Governor Shaktikanta Das said that there was a strong reason for co-ordinated global policy action and that the central bank chiefs of major economies, including India, were planning to have a virtual meeting to discuss the issue.

“Market action suggests that, yes there is some expectation of an out-of-turn rate cut,” said A Prasanna, an economist with ICICI Securities Primary Dealership, who himself expects a cut only in April. The RBI has been easing liquidity and credit conditions via other measures, reducing the urgency for an inter-meeting cut, he added.

Rate-cut hopes

Markets, however, are geared for a 25 bp cut either before or at the April 3 policy meeting.

Traders expect bonds to remain well bid on rate-cut hopes, while the rupee is expected to gain some ground after recent falls but the overall sentiment remains bearish.

The reversal in the rupee came following media reports of more confirmed cases of coronavirus in India, but there was no official announcement. The currency has declined about 2.5 per cent so far this year, having hit a 16-month low of 73.46 per dollar a little earlier.

“We think in the short term the rupee will claw back some of the losses seen this week. But fundamental weaknesses in terms of poor growth outlook and lack of credible policy responses will continue to weigh on the currency. The bias is for more depreciation over the medium term,” Prasanna said.