Indian benchmark bond hits 13-month high on record low CPI

MUMBAI: India's benchmark 10-year bond rose to a 13-month peak on Tuesday, gaining for a third consecutive session, after data showed sharply slowing inflation, while strong buying interest from foreign funds also bolstered sentiment.

Data released late on Monday showed consumer prices in September rose a slower-than-expected 6.46 percent from a year earlier, the lowest since figures were first published in January 2012.

Meanwhile, data out earlier on Tuesday showed wholesale price inflation hit its lowest in nearly five years last month, helped by a moderation in food and fuel prices.

The Reserve Bank of India (RBI) is nevertheless expected to keep interest rates on hold until the April-June quarter, given that it fears an uptick in inflation at the end of the year due to poor monsoon and a less favourable base effect from last year, although analysts say they expect the RBI to move more aggressively once it starts to loosen monetary policy.

"The surprise in inflation print coupled with the continued down move in commodity prices will result in the market pricing in rate cuts," said Kumar Rachapudi, a fixed income strategist with ANZ in Singapore.

ANZ economists currently expect the first rate cut in mid-2015.

The benchmark 10-year bond yield ended down 2 basis points at 8.40 percent. The yield touched 8.3589 percent in early deals, its lowest level since Sept. 5, 2013.

Dealers said strong appetite for debt from foreign investors was also factor behind the rise in bond prices. Foreign funds have bought debt worth $1.3 billion so far in October, taking total inflows in 2014 to $20.9 billion.

A drop in oil prices to near four-year lows a day earlier also boosted bonds by further easing inflationary fears.

In the overnight indexed swap market, the benchmark five-year swap rate ended down 3 bps at 7.57 percent. The rate dropped to as low as 7.53 percent during the session, its lowest since July 2013.

The one-year rate closed 4 bps lower at 8.28 percent after hitting 8.25 percent earlier in the day, its lowest since June 16.