Fall in bond yields seen continuing on further rate cut hopes

Government bond (G-sec) yields are seen falling further this year on expectations of further rate cuts by the Reserve Bank of India (RBI). The yield on the 10-year benchmark bond fell sharply after the surprise rate cut by RBI ahead of market hours. However, the yields witnessed corrections due to profit booking by traders.

The yield on the 10-year benchmark bond was trading at 7.61 per cent in early trades before closing the day at 7.69 per cent. The yield on the 10-year bond ended at 7.75 per cent on Tuesday, which was a seven-week closing high.

"The latest inter-meeting rate cut by RBI is expected to expedite the fall of the 10-year G-sec yields towards our year-end target of seven per cent," said Andre de Silva and Himanshu Malik of HSBC in a note to clients.

The repo rate or the rate at which banks borrow from the central bank was cut by 25 basis points (bps) on Wednesday to 7.50 per cent. This was the second cut in 2015. The first cut of 25 bps happened on January 15. The Street believes at least one more rate cut of 25 bps is in store due to easing inflation. Consumer Price Index-based inflation for January 2015 stood at 5.1 per cent. The data for February will be released next week.

Meanwhile, the rupee ended at an over one-week low due to aggressive dollar buying by state-run banks on behalf of the central bank. The rupee ended at 62.26 compared with the previous close of 61.92.

During intra-day trades, the rupee had even weakened to 62.28 to a dollar. The rupee had ended at 62.32 on February 23.

"RBI has been mopping dollars to bolster its reserves. Even the foreign exchange reserves data every week proves this. Today (Wednesday), too, we were buying dollars on behalf of them," said a senior treasury official of a state-run bank.

RBI's foreign exchange reserves stood at an all-time high of $334.19 billion for the week ending February 20.