Bond yields fall on expectations of rate cut by central bank

The yield on the 10-year bond ended at a 14-month low of 8.19% compared with Monday's close of 8.26%

The bond market is strongly factoring in a rate cut by the Reserve Bank of India (RBI) as early as next month, This resulted in the yield on the 10-year bond ending seven basis points (bps) lower than the previous close.

The fall was despite RBI's move to suck out liquidity of at least Rs 10,000 crore in the sale of government bonds on Wednesday.

The yield on the 10-year bond ended at a 14-month low of 8.19 per cent on Wednesday compared with Monday's close of 8.26 per cent. This was the sharpest fall since August 13, when it dropped to 8.55 per cent as against the previous close of 8.62 per cent. The yield ended at 8.14 per cent on August 8, 2013. On Tuesday, the bond market was shut for Muharram.

“There is an expectation that RBI will cut the rate and some people also believe it might happen as early as December. This is because of softening inflation,” said the head of treasury of a state-run bank. The fifth bi-monthly monetary policy statement is scheduled on December 2.

Foreign investors continued to buy, with net purchases of debt in 15 of the past 16 trading sessions. On Monday, foreign institutional investors bought $15.85 million worth of bonds, showed regulatory data.

"At current levels, the market is factoring in a 25-bps rate cut in the next policy (review)," said Baljinder Singh, a senior dealer with Andhra Bank here.

RBI has kept the repo rate at eight per cent since the January review. Consumer Price Index (CPI)-based inflation cooled to 6.46 per cent in September, the lowest since January  2012, due to falling prices of fruits and vegetables. It is expected that retail inflation numbers for October could fall below six per cent.