MUMBAI: Indian government bonds ended slightly higher in a range-bound session on Monday, as an unexpected interest rate cut in China was seen reinforcing the prospect that India's central bank would ease, possibly as early as next week.
Although most traders expect the Reserve Bank of India to cut rates in February, markets are bracing for a potential surprise at the review on Dec. 2.
At the very least, traders say they expect the central bank to adopt a more dovish tone.
China cut interest rates late on Friday in a bid to boost growth in the world's second-biggest economy. Although that is not expected to become a major factor in the RBI's thinking, traders say it still helps build the argument for easing in India.
More important to the RBI's thinking could be the July-September economic growth data due on Friday.
"Bonds will be range-bound up to policy, though GDP data should provide some momentum," said Baljinder Singh, a senior dealer with Andhra Bank in Mumbai, who sees the 10-year bonds in an 8.12-8.20 percent band.
The benchmark 10-year bond yield closed at 8.16 percent, down 1 basis point from its previous close. Easing consumer prices inflation has raised expectations for a rate cut, sending the 10-year bond yield down 12 basis points so far this month.
It hit a low of 8.14 percent last week, its lowest since Aug. 8, 2013.
In the overnight indexed swaps, the benchmark five-year swap rate closed down 6 basis points at 7.29 percent, the lowest since June 21, 2013.
The one-year rate ended down 5 basis points at 7.89 percent, its lowest since July 15, 2013.
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