Mumbai: Indian federal bond yields were steady on Thursday, 20 September, as cash conditions stayed tight due to tax payments, but traders said they expected yields to ease as short-term inflation and liquidity outlook were good.
Dealers said absence of fresh bond supplies over the next two weeks, expectation of improvement in cash conditions due to intervention in the foreign exchange market and softening inflation could push down bond yields.
By 9:55am (0425 GMT), the 10-year bond yield was at 7.82%, unchanged from Wednesday’s close. It hit its lowest since 31 July on Wednesday following a sharp cut in interest rates by the US Federal Reserve.
“I think bonds should rally ahead as the overall outlook is good,” the chief dealer at a foreign bank said.
He said annual inflation was expected to drop close to 3% in the week to 8 September and cash surpluses would improve as the government spending picks up pace by the month end. At the start of September, inflation was at 3.52%.
The central bank has been buying dollars to cap the rupee’s sharp gains over the last two days, which could pump in more liquidity into the banking system.
Traders said although oil prices were high, the government was unlikely to raise state-set fuel prices sharply and inflation could remain below the central bank’s comfort zone of 5% until the end of December.
Oil was near $82 a barrel after hitting record peaks earlier this week. India imports about 70% of its oil.
On Tuesday the US Federal Reserve lowered its federal funds target rate by 50 basis points to 4.75% to shore up the economy. It also cut the discount rate it charges for direct loans to banks by a half-point to 5.25%.