Mumbai: Indian federal bond yields fell to their lowest in nearly 2-1/2 months on 4 July, as traders expected the central bank would keep interest rates steady at its month-end policy review because of softening inflation.
Yields were also pressured by ample cash, with overnight money rates sliding to 0.5%, near a 10-year low of 0.1% hit in June and below 1.25-1.3% on 3 July.
At 12:34pm, the yield on the 10-year federal bond was at 8.03% — the lowest since 26 April, and below the previous close of 8.09%.
It has fallen 15 basis points so far this week and is 37 points down from a near 5-1/2-year high of 8.4% in June.
“The market has got a pleasant surprise on the liquidity front,” said Mohan Shenoi, treasurer at Kotak Mahindra Bank, because tax payments and a government purchase of a stake in State Bank of India failed to dent cash availability.
Quarterly tax payments drained about Rs20,000 crore ($4.9 billion), while the central bank’s stake transfer in State Bank to the government sucked Rs35,500 crore from the system.
But suspected central bank’s dollar purchases in the currency market to limit gains in the rupee have helped fund supplies, traders said.
With annnual inflation dropping to a 14-month low of 4.03 percent in the 12 months to June 16 from a two-year high of 6.7 percent in January, analysts believe the central bank will hold rates at its policy review on July 31.
Many economists had earlier expected at least one more rate increase this year. The central bank has raised its key lending rate five times since last June to curb inflation.
“With inflation falling and other indicators softening, the central bank may keep rates steady,” said Kotak’s Shenoi who expects the yield on the 10-year bond to fall to 7.75% in the near term.
JP Morgan expects it to hit 7.4% by March 2008.
Shenoi said slowing inflation may rekindle appetite for Friday’s Rs10,000-crore federal bond auctions.