Bond yields fall after PM said growth could be lower than forecast

Federal bond yields fell sharply on Monday as rate cut hopes gathered steam after the prime minister said that economic growth would be lower than the earlier government forecast.

At 10:30 a.m. the 10-year benchmark bond yield was at 8.16 percent, lower than Friday’s close of 8.22 percent.

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Prime Minister Manmohan Singh said on Sunday that the Indian economy would likely grow about 7 percent this fiscal year, lower than a revised forecast of about 7.5 percent growth issued by his government last month.

“The market momentum is very strong as expectations of a reversal of monetary policy has risen given comments from the PM on growth,” a dealer with a foreign bank said.

“Slowing growth indicators and authorities saying growth is now at the centre stage rather than inflation, has also raised expectations of CRR (cash reserve ratio) and repo rate cuts over the next few months,” he said.

Interest rates in India have peaked and economic growth concerns are back on the centre stage, Subir Gokarn, a deputy Governor at the RBI had said last week.

Traders said that sentiment was also boosted by a successful buyback, which would help boost liquidity and a bullish 140-billion rupee auction, which reassured appetite for government paper.

After markets closed on Friday, the Reserve Bank of India said it bought back Rs 8,471 crore ($1.60 billion) of bonds versus a target of Rs 12,000 crore.

The cut off yields for the 7.83 percent 2018 bonds and 8.79 percent 2021 bonds in the sale came in lower than market expectations in a Reuters poll.

Total volume on the RBI’s electronic trading platform on Monday was Rs 8,755 crore, double the volume in a regular trading session.

DATA WATCHED

With the monetary policy review on Jan.uary24, bond dealers are now awaiting two crucial data prints- factory output, due on January 12 and the headline inflation number for December, scheduled for release on Jan. 16- for possible cues on the likely central bank move.

“If the inflation data is positive (for the market), RBI will strongly consider rate action on Jan 24th,” said Ramesh Krishnan, Head of Treasury, Dhanlaxmi Bank.

“If no, they would wait for one more month’s data validation on inflation easing.”

India’s headline inflation has stayed above 9 percent for a year despite 13 rate hikes by the central bank since March 2010.

However, a rapid slowdown in food inflation in December has raised hopes of a cooling in overall inflation. The food price index fell an annual 3.36 percent in mid-December, the first drop in nearly six years.

“In policy, we expect repo rate cut to precede CRR (cash reserve ratio) cut,” Dhanlakshmi Bank’s Krishnan said.

The benchmark five-year swap rate was down 2 basis points at 7.04 percent, while the one-year rate unchanged at 7.71 percent.

Reuters