Indian bonds rally on hopes of bigger rate cut by RBI

Indian bonds rallied on Monday, sending the benchmark 10-year bond yield to its lowest since mid-2013, on hopes the central bank could cut interest rates by as much as 50 basis points next month after the government slashed the country's retail savings rate.

The government on Friday cut interest rates for term deposits offered to millions of small savers after the Reserve Bank of India reduced its key repo policy rate by 125 basis points last year.

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Banks had eagerly awaited the move: the relatively high rates offered by the government had discouraged savers from openings savings accounts at private lenders, since the sector could not match the rates offered by the federal programme.

Aligning the government rates with the private sector could spur banks to further cut their lending rates and encourage the RBI to cut rates more aggressively at its April 5 policy review, analysts said.

"Market had priced in a 25 bps rate cut, but this incremental rally which is happening after the savings rate cut is largely happening on expectation of a 50 bps rate cut," said Laxmi Iyer, chief investment officer for debt and head of products, Kotak Mahindra Asset Management Co Ltd in Mumbai.

The benchmark 10-year bond yield was down 3 bps at 7.49%, after earlier falling to 7.47% the lowest since July 2013.

Investors also took comfort after the government said on Friday it would borrow a net 2.48 trillion rupees ($37.28 billion) from April to September, along expected lines.

Bonds have rallied since the government said on Feb. 29 it would stick to its fiscal deficit target for the year starting in April. Gains intensified after data last week showed retail inflation eased more than expected in February.

The 10-year bond yield has fallen 14 bps since Feb. 29.

But liquidity conditions still remain tight given the government typically holds back on spending towards the close of the financial year.

The RBI has tried to ease cash conditions by announcing 620 billion rupees worth of open market bond purchases since January.

($1 = 66.5250 Indian rupees)