Bond yields at 4-yr low on RBI rate cut hopes

Bond yields at 4-yr low on RBI rate cut hopes

Mumbai: Indian federal bond yields fell to fresh 4-year low on Friday as traders speculated that the Reserve Bank of India (RBI) would cut interest rates soon to prop up flagging growth, with inflation dropping to its lowest in 9-months.

Hopes of lower rates have also been bolstered by a huge US rate cut this week and a sharp drop in global oil prices to 4-year lows of around US $36 per barrel.

At 10:42am, the benchmark 10-year bond yield was at 5.44%, off an early trough of 5.40%, its lowest since June 2004. It ended at 5.50% on Thursday.

The yield was on track to post its 10th drop in as many days. At the day’s low the yield has fallen 81 basis points (bps) this week and 167 bps in December.

Volume was normal at Rs4,080 crores, with the 10-year bond being the most heavily traded.

“Bonds are rallying mainly due to rate cut expectations from the RBI and falling crude prices," said a trader at a state-run bank.

Estimated inflows of up to Rs16,000 crores from a special deposit scheme that matures in the first week of January also underpinned the market, he said.

Dealers are betting that RBI will cut interest rates before a review in January as Thursday’s data showed annual inflation slowed to 6.84% in early December, below the RBI’s target of 7% for the 2008-09 fiscal year.

RBI governor Duvvuri Subbarao said next year would be a more challenging year and it would continue to do everything possible to lessen the domestic effects of the global financial crisis.

Sonal Varma, an economist at Nomura Research, expects inflation to fall below 2.5% by end-March 2009 and she expects the RBI to cut rates aggressively to aid growth.

“We are pencilling in a 250 bps cut in banks’ cash reserve requirements to 3%, a 150 bps cut in the repo rate to 5.0% and a 100 bps cut in the reverse repo rate to 4%, all by mid-2009," she also said.