MUMBAI: Indian government bonds rallied for a third straight session on Thursday, hitting their highest level in four-and-a-half months, as investor sentiment got a boost after the central bank greatly toned down its rhetoric on inflation earlier this week.
The Reserve Bank of India's policy statement that it would not raise interest rates further as long as inflationary pressures continued to ease has raised hopes the central bank could even cut interest rates as early as this year.
But analysts warn that El Nino impact causing a weak monsoon could send food prices sharply higher and force the central bank to raise rates.
"Buying momentum in the market is quite strong. FIIs have also been buying debt almost on a daily basis. With such momentum, it is difficult to exactly predict where the market is headed," said Manish Wadhawan, head of interest rates at HSBC.
"The policy statement has made it clear that there is almost negligible chance of a rate hike. We could see the 10-year consolidate around 8.50 percent levels."
The benchmark 10-year bond yield ended down 6 basis point at 8.53 percent, after hitting 8.52 percent, its lowest level since Jan. 21.
Traders said heavy position cutting was seen in the overnight indexed swap market.
The benchmark five-year swap rate fell to 7.75 percent, its lowest level since July 15, 2013, while the one-year rate dropped as low as 8.15 percent, its lowest since Jan. 21.
The two rates ended at 7.75 percent and 8.16 percent respectively, from their previous closes of 7.86 percent and 8.21 percent.
Traders say several swap positions held as hedge against bond holdings are getting unwound as traders are no longer expecting any rate hikes after the policy review.
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