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The bond market rallied on Monday owing to value buying by traders, while the rupee strengthened because of dollar sale by banks and the government's clarification on Minimum Alternate Tax (MAT).
The yield on the 10-year benchmark bond closed at 7.89 per cent on Monday, down nine basis points from the previous close. The rupee ended at 63.86 a dollar, up eight paise compared with the previous close.
The bond market was volatile during the day, with the major fall happening in the last two hours of trading. The rupee, too, traded volatile in the band of 63.77-64.01 a dollar. The currency had opened at 63.86 on Monday.
The US jobs data released on Friday showed the economy there was picking up steam, but not by enough to raise concerns about an earlier-than-expected rate rise.
“The expectation in the market is that the US Fed might not hike rates soon. There has been value buying in bonds and that helped the market. Bond yields should not have gone beyond elevated levels of 7.95 per cent. In the near term, the trading range will be between 7.80 and 7.90 per cent,” said Debendra Kumar Dash, assistant vice-president (money market) at DCB Bank.
Traders have been buying bonds in anticipation that there are more rate cuts in the offing in the current financial year. “The value buying is because bonds are attractively priced. There may be more rate cuts of 25-50 basis points in FY16,” said Badrish Kulhalli, head of fixed income at HDFC Life.
The Reserve Bank of India (RBI) will review the monetary policy again next month, while the retail inflation data for April will be released on May 12.
Consumer Price Index (CPI)-based inflation had unexpectedly slowed down to a three-month low of 5.17 per cent in March as food prices moderated.
Since the start of 2015, RBI has cut the repo rate by 50 basis points; it stands at 7.50 per cent now.
“The rupee appreciated due to clarifications by the government on the minimum alternate tax (MAT) issue. Besides that, today (on Monday) even the central bank was selling dollars through state-run banks,” said Sandeep Gonsalves, forex consultant and dealer at Mecklai & Mecklai.
To ease the concerns of foreign investors who received tax notice for MAT, the government on Monday decided to put on hold the issuance of fresh notices.
