In April, government bonds rallied due to lower inflationary pressures, a rate cut by the Reserve Bank of India and surplus inter-bank liquidity. Last month, the central bank cut repo and reverse repo rates by 25 basis points to 4.75% and 3.25%, respectively.
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One basis point is one hundredth of a percentage point. At the end of the month, the yield on the 10-year benchmark 6.05% paper declined to 6.22%, down from 6.96% in March, leading to rise in bond prices. Bond yields and prices move in opposite directions. Weak economic data and bond purchases by state-owned banks to maintain statutory liquidity ratio—the mandated minimum amount they have to keep in cash, gold and government securities—boosted bond prices.
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The market was also buoyed by a fall in factory output, which led to expectations of a further fall in interest rates. Industrial production declined by 1.2% year-on-year in February, compared with an increase of 0.4% in January.
Graphics by Ahmed Raza Khan/Mint