<div style="float: left;">
		<img align="" alt="" class="imgCont" height="163" src="http://bsmedia.business-standard.com/_media/bs/img/article/2014-01/28/full/1390853934-172.jpg" style="border: 1px solid #DDD; margin-right: 10px; padding: 1px; float: left; z-index: 0;" title="" width="218" />
		<div>
			Government bonds surged to their highest in nearly 20 months while the rupee jumped to a one-month high on Wednesday after the Reserve Bank of India (RBI) lowered interest rates, in a move that came earlier than expected.</div>
		<br />
		<div>
			The RBI lowered its key policy repo rate by 25 basis points to 7.5%, its second inter-meeting cut this year on the back of easing inflation and what it said was the &quot;weak state&quot; of parts of the economy.</div>
		<br />
		<div>
			The move was also seen as backing the government&#39;s budget unveiled on Saturday.</div>
		<br />
		<div>
			The Reserve Bank of India caught markets off guard, just as it did in January when it made the last interest rate cut, as traders had expected the central bank to wait until a scheduled policy review on April 7.</div>
		<br />
		<div>
			&quot;I think the RBI clearly viewed the Budget as more positive than the markets,&quot; said Kumar Rachapudi, a senior fixed income strategist at ANZ Bank based in Singapore.</div>
		<br />
		<div>
			&quot;If this is an indication of the confidence the RBI has in the government and vice-versa, I think the medium term lower rates story has a fair way to go. We continue to advocate long positions in 10 year bonds,&quot; he added.</div>
		<br />
		<div>
			The benchmark 10-year bond yield was trading at 7.67% by 0614 GMT, after hitting 7.6060% earlier, its lowest level since July 15, 2013.</div>
		<br />
		<div>
			Market participants say they now expect the next RBI rate cut to come after its scheduled April policy review, likely around the next meeting in June, unless consumer inflation unexpectedly picks up.</div>
		<br />
		<div>
			Traders and analysts are broadly predicting the 10-year yield will drop towards 7.25% over the next six to eight months.</div>
		<br />
		<div>
			The partially convertible rupee also hit a one-month high of 61.65 to a dollar but central bank intervention pulled the rupee back to 61.85/86 levels. The rupee had ended Tuesday at 61.9150/9250.</div>
		<br />
		<div>
			In the overnight indexed swap markets, the one-year rate fell sharply to 7.50%, its lowest level since Feb 3, in an immediate knee-jerk reaction to the budget. It was last trading at 7.55% versus Tuesday&#39;s 7.76%.</div>
		<br />
		<div>
			The benchmark five-year swap rate dropped to as much as 6.92% from Tuesday&#39;s close of 7.10%. It was last trading at 6.95%.</div>
	</div>

Following the 25 bps rate cut by the Reserve Bank of India (RBI), the rupee opened strong but most gains were wiped off after state-run banks started buying dollars possibly to boost the foreign exchange reserves of RBI.

Bonds at 20-month highs, rupee gains after surprise rate cut

Traders and analysts see 10-year yield dropping towards 7.25% over the next six to eight months

More From This Section

Rupee weakens four paise at 61.87

Bonds fall; Budget raises doubts about pace of rate cuts

Need to bring offshore rupee derivatives market onshore: RBI

Forex reserves hit a new high of $334.2 bn

Explore News