MUMBAI: Indian government bond yields drifted lower in early trades on Wednesday, as sentiment remained positive a day ahead of the Reserve Bank of India’s last monetary policy decision for the current financial year.

India’s benchmark 10-year yield was at 7.0672% as of 10:00 a.m. IST, following its previous close of 7.0904%.

“The market is taken over by bulls after the budget and there are expectations building up that the central bank would provide a dovish guidance, setting the stage for easing in the next financial year,” a trader with a state-run bank said.

The RBI is expected to hold the key interest rate steady on Thursday, according to a Reuters poll, although policymakers’ commentary remains key amid easing inflationary pressures and a fiscally prudent federal budget announcement last week.

The central bank may strike a dovish tone, post a healthy budget and largely comfortable global narrative, but it will fall short of any stance change and there may be no material change in the assessment of macro variables, Emkay Global said.

Traders will also keenly await guidance on the banking system liquidity, especially after the central bank’s aggressive withdrawal of cash from the system so far this month.

The RBI conducted two separate overnight variable rate reverse repo auctions on Tuesday and will conduct a similar operation later in the day.

India bond yields contrast Treasury move, dip with focus on RBI policy

Sentiment has improved after the government said it aims to reduce the fiscal deficit and lower its gross borrowing by a wide margin next financial year, which has spurred Indian bond yields to move in contrast to their US counterparts.

Treasury yields eased slightly on Tuesday, but remain elevated, with the 10-year yield around 4.10%, as strong economic data and Federal Reserve Chair Jerome Powell’s hawkish comments pushed back expectations on the timing of rate cuts in the world’s largest economy.

The odds of a Fed rate cut in May have declined to around 66% from 88% last week.