MUMBAI: India's benchmark 10-year bond rose to its highest in more than 15 months on Tuesday and posted its third day of gains after Finance Minister Arun Jaitley was quoted by media as saying interest rate cuts would benefit the domestic economy.
Jaitley's comments added fuel to expectations that the Reserve Bank of India will ease monetary policy as early as December or February given that consumer inflation is easing sharply.
Although the RBI is not statutorily independent from the finance ministry, it enjoys wide latitude in setting monetary policy. Nonetheless, analysts say the RBI will feel the pressure to cut interest rates.
"There is pressure from all sides on the RBI to cut rates, and other macros are also indicating that they should cut. So, there is a possibility of a December rate cut," said Anoop Verma, senior vice president at DCB Bank.
"We are likely to see bonds continue to gain as sentiment remains bullish. The 10-year could touch 8 percent levels soon."
The benchmark 10-year bond yield closed lower 3 basis points at 8.15 percent, after touching 8.14 percent, its lowest since Aug. 8, 2013.
Domestic news agency NewsRise quoted Jaitley as saying that food inflation had moderated and then concluding: "Therefore, if RBI, which is a highly professional organization, in its wisdom decides to bring down the cost of capital, it will give a good fillip to the Indian economy."
Traders expect the 10-year bond yield to trade in an 8.10 to 8.25 percent range in the near-term and a broad 8.00 to 8.35 percent range this month.
In the overnight indexed swaps, the benchmark five-year swap rate closed 5 bps lower at 7.38 percent and the one-year rate ended down 3 bps at 7.99 percent.
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