Mumbai: Federal bond yields dropped on Friday as expectations intensified the RBI may slash interest rates after it set a lower-than-expected cut-off yield at a bond buyback auction on Thursday.
At 10:23am, the 10-year benchmark bond yield was at 5.41%, taking the fall to 79 basis points this week after a 113 basis points rise in the previous week. It had ended at 5.55% on Thursday.
Volume was heavy at Rs82.75 billion on the RBI’s trading platform with the 10-year bond being the most traded.
RBI bought back Rs30 billion of market stabilisation scheme (MSS) bonds on Thursday and set a cut-off price of Rs104.52, or a yield of 4.2906%.
The market had expected a cut-off yield of 4.40-4.50%.
“It shows that the central bank will cut interest rates further and the corridor between the repo and reverse repo will be narrower,” said S Srikumar, head of fixed-income at Corporation Bank in Mumbai.
Traders said they would keenly wait for the results of a Rs100 billion federal debt auction later in the day before taking aggressive positions.
Since mid-October, the RBI has cut the repo rate, at which it lends to banks, by 350 basis points as high borrowing costs and the global financial crisis took a toll on economic growth.
“The 10-year bond yield is likely to fall to 5% levels over the next two weeks as a result of falling inflation, tumbling global commodity prices and a further slowdown in global economies,” Srikumar said.
Foreign banks were the major sellers and public, private banks and mutual funds were main buyers on Thursday.