India's benchmark 10-year bond prices gained for a second consecutive session on Friday, pushing the yield at one point to a one-and-a-half month low, on hopes the central bank will cut interest rates to bolster sagging domestic growth. Traders say Thursday's much weaker-than-expected GDP data for the last quarter of fiscal 2012 has tilted the balance for the central bank toward restoring growth over fighting inflation.
The Reserve Bank of India meets next on June 18, after delivering a 50 basis points cut in the repo rate in April, when it had also signalled reluctant to ease further. The near-term rate cut expectations was particularly well reflected in the 1-year swap rate, which dropped 12 basis points to 7.65 percent, after already dropping 15 bps on Thursday. "If inflation/core inflation behaves itself, one can expect swift measures to ease the monetary policy, either in terms of liquidity infusion and/or rate cuts," said Sandeep Bagla, senior vice president with ICICI Securities Primary Dealership.
The benchmark 10-year bond yield fell 1 basis points to 8.37 percent, after falling to as low as 8.34 percent in the session, a level last seen in mid-April. The 10-year yield dropped 14 basis points on Thursday, after the GDP data. Volumes remained heavy on Friday, reaching 229.85 billion rupees ($4.09 billion) on the central bank's electronic trading platform, more than double the daily average volume. Sinking global crude prices are further helping bonds gain, raising expectations it will help ease inflationary pressures and give more room for the RBI to cut rates. Lower oil would also help offset some of the inflationary pressures from a weaker rupee. Also on Friday, the government sold 150 billion rupees in bonds. In longer-end OIS, the 5-year OIS rate eased 6 bps to 7.28 percent.