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indian-rupees-MUMBAI: Indian bonds rose slightly on Thursday as markets continue to cautiously price a potential surprise rate cut from the central bank next week, although trading has been largely range-bound, with yields ending unchanged for the week.


Most analysts polled by Reuters expect the Reserve Bank of India to keep its repo rate unchanged at 8 percent on Tuesday, seeing as a cut in banks' reserve requirements as a more likely outcome.


However, markets are nonetheless ready for a surprise outcome, with 1-month OIS falling 7 basis points to 7.83 percent from Tuesday, well below the repo rate.


"The 10-year bond and OIS would continue to trade within the set ranges of 8.12-8.15 percent, and 7.57-7.62 percent for the one-year OIS, and 6.97-7.02 percent at the five-year swaps until the policy," said Moses Harding, head of asset-liability management at IndusInd Bank.


The benchmark 10-year bond yield fell 1 basis point to 8.13 percent.


Yields ended unchanged for the week, having largely moved in a narrow 2 bp band after hitting a Sept. 17 low of 8.12 percent last week.


Trading was thin, with only 135 billion rupees of bonds changing hands, lower than the 214 billion rupees on Tuesday as FX and debt markets will be shut for a banking holiday on Friday after also closing on Wednesday.


A surprise 25 bps rate cut from the RBI could spark a rally in bond markets, with traders estimating the yield could drop to 8 percent.


However, a cut in cash reserve ratio alone is likely to send bond prices lower, by reducing expectations for RBI bond purchases via open market operations.


India's benchmark 5-year overnight indexed swap ended flat at 6.98 percent, having gained 1 bp for the week.


The 1-year swap rate eased 1 bp to 7.59 percent, and ended unchanged for the week.


Copyright Reuters, 2012

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