Indian bonds rally, swap rates fall; WPI raises rate cut hopes

MUMBAI: India's 10-year bond yield dropped to 1-1/2 month lows while near-end swap rates slid to 2-year lows after lower-than-expected core wholesale inflation data cemented expectations the central bank will cut interest rates in the May 3 policy review.

Investors had already anticipated the Reserve Bank of India would ease monetary policy for a third time this year after data last week showed industrial output data barely growing and retail inflation edging towards single-digits.

Prospects of RBI relief could help support bonds after the 10-year yield hit a yearly high of 8 percent early this month as India registered a record current account deficit in the October-December quarter.

That is keeping some analysts more cautious about the prospect of rate cuts, while others pointed to the upward revision in January wholesale inflation to 7.31 percent from the previously reported 6.62 percent as also meriting scepticism.

"On rates, the RBI will be in a tough spot as the recent deterioration in the current account position warrants rates to be left high to cool the economy, though the softer inflation numbers provide a window to ease," said Radhika Rao, an economist at DBS in Singapore.

The 10-year bond yield fell 3 basis points (bps) from Friday's close to 7.84 percent, as of 0813 GMT.

The yield had earlier slid to a session low of 7.8150 percent, a level last seen on Feb. 28

The falls come after data showing India's headline inflation in March slowed to 5.96 percent, the lowest rate in more than three years, and below expectations for 6.4 percent.

Core wholesale price inflation, which strips volatile indexes such as food and fuel prices, eased to around 3.5 percent from 3.8 percent in February, analysts said.

The RBI has cut interest rates in the last two successive policy reviews by 25 basis points each, and bond prices had been volatile due to concerns about whether the central bank would do so again next month.

The 1-year overnight interest swap (OIS) rate was trading down 3 bps at 7.33 percent from its Friday close, after earlier hitting a session low of 7.31 percent, its lowest since March 2011.

The benchmark 5-year swap rate was down 3 bps at 7.11 percent after earlier hitting its lowest since Jan. 3.