Mumbai: The bond yields plunged to two-week lows on Thursday, as the rate cut hopes mounted on falling of industrial production in December and slowing of inflation to its lowest level in over a year.
Yield on the most traded 8.24% bond maturing in April 2018 ended at 6.07%, off a low of 6.04%, a level last traded on 29 January. On Wednesday, it closed at 6.30%.
The yield has fallen 46 basis points (bps) from an eight-week high of 6.53% on 5 February. as expectations of further rates cuts and other policy measures have overshadowed concerns about extra bond issuance.
“Lower inflation and a surprise negative industrial data have raised hopes the central bank (RBI) may cut rates soon to shore up growth,” said Prasanna Patankar, senior vice president at STCI Primary Dealers.
In December, the index of industrial production (IIP) dropped by 2.0% from a year ago.
Volumes were a high Rs133.45 billion on the Reserve Bank of India’s trading platform, with the 2018 bond being most traded.
Dealers said Friday’s auction of Rs80 billion of government debt should provide cues on market appetite for debt, after the government said this week an extra Rs460 billion of bonds would be sold before the end of March.
Traders said the extra borrowing has sparked some speculation that banks’ reserve requirements may be cut again to keep cash markets fluid ahead of the auctions.
Edelweiss said in note that without significant monetary accommodation from the RBI, the large government borrowing will put pressure on interest rates.
“We expect reduction of both repo and reverse repo rate by 50 bps each in February itself,” said Edelweiss economists Siddhartha Sanyal and Abhishek Singhal said.
Helping support sentiment, annual inflation fell to 4.39% at end-January, its lowest in just over a year, as a fuel price cut took effect.