Indian govt bond yields decline on interest rate cut expectations

Indian government bond yields ended marginally lower on Thursday, a day ahead of the central bank's monetary policy decision where it is widely expected to cut interest rates.

 

The benchmark 10-year yield ended at 6.6562% compared with Wednesday's close of 6.6616%. 

The Reserve Bank of India is widely expected to cut rates for the first time in nearly five years, in new Governor Sanjay Malhotra's first monetary policy review. 

A majority of economists and market participants expect a 25 basis points cut on Friday. The RBI's decision is due at 10:00 a.m. IST. 

"We think the MPC (monetary policy committee) will go ahead and start cutting repo rate by 25 bps in tomorrow's policy as real rates are currently very high, leading to growth slowdown and inflation is trending back to the MPC target of 4%," said Trust Mutual Fund CEO Sandeep Bagla. 

"The reduction in interest rates is likely to bring yields lower across the government securities as well as the corporate bond curve." 

Expectations of a rate cut have risen since the RBI announced its mega liquidity infusion package through which it would inject around 1.50 trillion rupees ($17.13 billion) into the banking system. 

The central bank has already injected around 640 billion rupees through an open market purchase of bonds and FX swap, while a 56-day repo worth 500 billion rupees is due on Friday. 

This would be followed by two more open market purchases of 200 billion rupees each on February 13 and February 20. Apart from this, the RBI has also bought bonds worth around 310 billion rupees from the secondary market in January. 

Most market participants expect the RBI's bond purchases to continue into the upcoming financial year as well. As a result, bonds are seeing increased buying interest from foreign investors since last few days.