Mumbai: Indian federal bond yields fell below 8% on 5 July to their lowest level in more than 2 months, as softening inflation reinforced hopes the central bank may keep rates steady when it meets on July 31.
At 10:06am (04:36 GMT), the yield on the 10-year federal bond was at 7.98% — a level it last tested on 26 April and below the previous close of 8.03%.
It has fallen 20 basis points this week and is 42 points down from a near 5-1/2-year high of 8.4% in June.
Average trading volume in each of the first three days this week has spiked to Rs12,190 crore ($3 billion) — the highest so far in 2007, as traders feel the Reserve Bank of India (RBI) may not take steps to drain cash until the policy meeting.
“Cash is ample, inflation is down, credit growth is slowing. Bonds are looking great and I expect the 10-year yield to fall to 7.8% by next week,” said a fund manager.
Overnight money rates — an indicator of cash surpluses fell to 0.3%, nearing a 10-year low of 0.1% hit in June and below 0.5-0.75% on Wednesday, 4 July.
This has led to robust investor demand at the RBI’s weekly treasury bill auctions.
The central bank set a cut-off price of Rs98.48 at the 91-day treasury bill auction on 4 July, higher than Rs98.19 at the last auction. The RBI had received bids for 12.5 times the 91-day bills on offer, compared with 3.3 times a week earlier.
Annual wholesale price inflation fell to a 14-month low of 4.03% in the 12 months to 16 June from a two-year high of 6.7% in January.
Some analysts expect a further drop in bond yields to be muted ahead of the outcome of central bank policy meetings in Europe on 5 July.
The Bank of England is widely expected to lift rates by 25 basis points to 5.75% after a two-day meeting that ends 5 July while the European Central Bank is expected to keep rates steady at 4%.