Government bond yields fall to 17-month low

It will pave the way for the central bank to cut interest rates

Government bond yields fell to a 17-month low on Thursday on optimism that slowing inflation will pave the way for the central bank to cut interest rates.

The retail inflation data for November will be released on Friday and the Street believes it might have cooled to an annual rate of 4.5 per cent.

The yield on the 10-year benchmark bond ended at 7.87 per cent on Thursday, compared with the previous close of 7.91 per cent. The yield had ended at 7.56 per cent on July 15, 2013.

The price of crude oil sank to a five-year low yesterday as the Organisation of Petroleum Exporting Countries (OPEC) cut a forecast for how much crude it will need to produce next year by about 300,000 barrels a day to 28.9 million, the least since 2003.

"Due to expectations of softer inflation trades were buying bonds due to which bond yields have been falling. Tomorrow the yield on the 10-year bond may trade in the range of 7.85-7.90 per cent," said Debendra Kumar Dash, associate vice president (treasury), Development Credit Bank.

Finance Minister Arun Jaitley reiterated yesterday that he agrees with suggestions that the time has come to lower borrowing costs. Reserve Bank of India governor Raghuram Rajan who left interest rates unchanged for a fifth straight meeting on December 2 at 8 per cent, said a change in the monetary policy stance is likely early next year should improvements in inflation and fiscal health continue.

"The OPEC report is a major trigger for the market move today," said Abhay Garg, vice president for fixed income at PNB Gilts. "Slumping oil prices coupled with the decisive fall in inflation are boosting sentiment."

Due to sharp fall in oil prices since the end of June, retail inflation softened to 5.52 per cent

in October, the least since the index was created in early 2012. RBI has revised down the CPI inflation target to 6 per cent for March 2015 indicating central bank's increasing confidence to traverse inflation glide path. Earlier RBI was targeting to bring down CPI inflation to 8 per cent by January 2015.