Government bonds rallied on Monday on expectations of an interest rate cut to help support the economy and as a continued fall in crude oil prices further supported sentiment. Expectations for earlier-than-expected rate cuts next year and the announcement of government reforms have helped spark a rally in bond markets, with benchmark 10-year yields falling in seven out of the last nine trading sessions.
The yield on the 10-year benchmark government bond ended at an over one-yea- low of 8.32% compared with previous close of 8.36%.
The call for monetary easing comes even as Reserve Bank of India (RBI) governor Raghuram Rajan has signalled the central bank would not ease policy until it is confident of lower inflation. Rajan's stance is at odds with a majority of the external members in the RBI monetary policy committee who had recommended the central bank cut the repo rate by at least 25 basis points at the review on September 30, according to minutes out late on Wednesday.
"Bonds will continue to gain in the near-term. We could see 8.25% on the 10-year soon. Oil prices and the outcome of the FOMC meeting will be key for markets," said Harish Agarwal,a fixed income trader with First Rand Bank. At the two-day meeting of the Federal Open Market Committee (FOMC) on Tuesday and Wednesday it is expected that asset-purchase programme will be wrapped up. The programme which once stood at $85 billion is now at a mere $ 15 billion. However, experts believe rate hikes by the US is still far.
Sentiment was also supported after Brent crude oil fell towards $85 a barrel on Monday after Goldman Sachs slashed its price forecasts, citing abundant supply and lacklustre demand despite a pick-up in global economic growth. Dealers will however be wary of adding very large positions as the central bank could choose to conduct an open market sale of bonds to put brakes on the rally, some dealers said.
The expectation of the bond market is that in six-months time the yield may fall to 8% as one rate cut by RBI will happen by end-March.
