Yields expected to fall further; rupee may firm up

The Street anticipates RBI to cut repo rate by at least 25 basis points

Government bond yields are expected to fall further this week on hopes of a repo rate cut in the annual monetary policy for 2013-14 on Friday. The Street is expecting the Reserve Bank of India (RBI) to cut the repo rate by at least 25 basis points.

The yield on the 10-year benchmark government bond 8.15 per cent 2022 closed at 7.75 per cent on Friday, compared with the previous close of 7.77 per cent. According to government bond dealers, this week the yield could drop to 7.70 per cent before the policy. If RBI cuts the repo rate and the guidance is about further rate cuts, then the yield would drop to 7.65 per cent.

Repo rate (the rate at which banks borrow from RBI) is currently at 7.50 per cent. The expectations of a rate cut had built up after the wholesale price index (WPI)-based inflation for March rose 5.96 per cent, after an annual uptick to 6.84 per cent in February. The other comforting factor was that the current account deficit (CAD), which had widened to a record high in the quarter-ended December 31 is expected to narrow down in the fourth quarter.

The CAD rose to a record high of 6.7 per cent of GDP in the December quarter on account of heavy oil and gold imports, besides muted exports. CAD had been 5.4 per cent of GDP in the previous quarter and 4.4 per cent in the third quarter of last year.

The rupee is expected to appreciate this week, as the Street expects RBI to announce further easing of export credit norms in the policy. It ended at Rs 54.38 on Friday, compared with the previous close of Rs 54.22, due to month-end dollar demand by importers.

The rupee is expected to trade in the range of Rs 54.00 to Rs 54.50 per dollar this week.