Indian bond yields fall as central bank report ignites rate pause hopes

MUMBAI: Indian federal bond yields fell on Tuesday on hopes that the Reserve Bank of India may pause in its long drawn tightening cycle after a central bank report raised concerns about slowing economic growth.

The market had been pricing in a quarter percentage point rate increase when the central bank reviews policy later in the day at 0530 GMT. The Reserve Bank of India has raised rates 12 times over the past 19 months.

10-year benchmark yield was down 8 basis points at 8.74 percent. It has been trading in the 8.73/8.78 percent range in the day.

"The macroeconomic developments (review) are quite dovish and for the first time he (Gov Subbarao) seems to be more concerned about growth so the market expectation is tilting towards a pause," a senior trader with a foreign bank said.

Traders broadly expect bond yields to trade in the 8.75 to 8.90 percent range for the day.

Total volumes on the central bank's electronic trading platform were at 28.4 billion rupees ($ 571.4 million).

India's central bank, in its macroeconomic report released post trading hours on Monday, said inflation remains "sticky" even though risks to growth have risen, while weakening investment imperils growth for the next fiscal year, complicating its policymaking task.

However, a poll by Reuters last week showed the Reserve Bank of India will deliver one final interest rate increase on Tuesday at its policy review and then pause until the end of the fiscal year in March.

"It is more of a position adjustment, people are squaring off positions before policy. Policy decision will determine the direction of yields. Also supply will start again on Friday and rates will be adjusted accordingly," said Manish Wadhwan, head of rates at HSBC India.

The government will auction 150 billion rupees ($3 billion) of bonds on Friday.

The sale is a part of the scheduled borrowing of 2.2 trillion rupees through dated securities during October-March instead of the previous estimates of 1.67 trillion rupees.

The domestic debt market will be closed on Wednesday and Thursday for religious festivals.

The benchmark five-year swap was at 7.38 percent from 7.44 percent previously and one-year rate at 8.19 percent from 8.28 percent at Monday's close.

Copyright Reuters, 2011