India bonds touch 13-month peak on reforms optimism

By Gaurav Pai

MUMBAI (Reuters) - The government bonds hit a 13-month high Thursday on hopes recent government reforms and likely rate cuts by the Reserve Bank of India (RBI) would help offset any impact of an earlier-than-expected increase in U.S. interest rates.

The gains came on a day when shares bucked other emerging markets to touch a record high after the U.S. Federal Reserve ended its massive bond-buying programme on Wednesday, but laced its economic assessment with a tinge of hawkishness.

Some analysts however said the bond market rally may have come a little too-soon as the RBI is expected to retain key rates at its next policy review on Dec. 2.

Credit ratings agency Moody's Investors Service welcomed recent efforts by the government and its central bank to boost economic growth and attract long-term investments, but said the measures would need to be sustained to have an actual impact on sovereign ratings.

"There are fears in some quarters that the current rally may have been over-done because RBI is still in wait-and-watch mode," said Ganti Murthy, head of fixed income at IDBI Asset Management in Mumbai.

The benchmark 10-year bond yield ended at 8.29 percent against its close of 8.32 percent on Wednesday.

The yield dropped to as low as 8.28 percent in choppy intraday trade, a level last seen in August 2013, after hitting a high of 8.34 percent.

The yield on the 10-year benchmark has fallen 22 basis points since Oct. 1, helped by continued buying by foreign investors, easing inflation, and a slump in global crude prices.

India's five-year swap rate ended flat at 7.50 percent, while the one-year rate rose 2 basis points to 8.10 percent.

(Editing by Biju Dwarakanath)