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Bond yields fall to January levels on RBI policy cues

LiveMint logoLiveMint 05-06-2014 Dinesh Unnikrishnan

Mumbai: The yield on India’s benchmark bond fell to the lowest levels since January on Thursday, following signals from the Reserve Bank of India (RBI) at its monetary policy review early this week that the apex bank may reduce rates if inflation eases faster than currently anticipated.

At 12.25pm, the yield on the 8.83% bond maturing in November 2023 was trading at 8.557%, the lowest since 21 January 2014. The 10-year yield closed at 8.599% on Wednesday.

Comfortable liquidity conditions and a renewal of foreign institutional investor (FII) buying into the bond markets has also led to stronger demand for bonds from local and foreign investors, leading to a rise in bond prices. Bond yields and prices move in opposite directions.

On Tuesday, RBI governor Raghuram Rajan retained the central bank’s key lending rate, the repo rate, at 8% and cut the statutory liquidity ratio (SLR) requirement for banks by half a percentage point to 22.5% to make extra liquidity available to the banking system. SLR is the portion of deposits banks need to invest in government bonds.

The SLR cut may not have any immediate impact on the banking system since most banks hold 5-6% more than the stipulated requirement, but could help once demand for credit picks up. The move was seen as a growth supportive measure by the central bank.

Rajan also said the apex bank might not tighten policy rates further if inflation sticks to the anticipated course. “If disinflation, adjusting for base effects, is faster than currently anticipated, it will provide headroom for an easing of the policy stance,” added the RBI in it’s policy guidance.

RBI expects the retail inflation to fall to 8% by January 2015 and 6% a year later.

“The RBI has adopted a wait-and-watch mode ahead of the announcement of the central government budget in July,” Gaurav Kapur, a senior economist at Royal Bank of Scotland Group Plc in Mumbai, wrote in a research note emailed on Wednesday.

“The budget statement would provide a clear indication of how the new government intends to tackle the key challenges facing the economy,” Kapur said.

RBI has tightened the policy rate by 75 basis points since September 2013 to fight inflation in Asia’s third-largest economy.

The optimism on a revival in economic growth has supported the domestic currency as well. Since the beginning of this year, the rupee has gained 4.24%. Over this period, foreign institutional investors have bought $8.13 billion in the local equity markets and $7.7 billion in the local debt markets.

Bloomberg contributed to the story.

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