MUMBAI: Indian government bond yields dropped on Thursday, tracking gains in the rupee and after a local news agency report quoting central bank chief Raghuram Rajan caused some traders to believe the upcoming policy may be more dovish than expected.
News agency Cogencis reported that when asked for his view on cuts in Indian economic growth forecasts by multilateral funding agencies, Rajan said, "All that will be responded to in the policy."
Some traders took that as a cue that the largely expected rate hike of 25 basis points on Oct. 29 may not actually happen, although not all took that view.
"Positioning was very light and comments by the governor regarding addressing growth lent support to bonds," said Dinesh Ahuja, a fixed income dealer with SBI Funds Management.
"Looks like the market will continue to remain range bound. Don't think traders will take aggressive positions ahead of the policy as there are too many variables that the RBI can tinker with," he added.
The benchmark 10-year bond yield closed at 8.58 percent, down 5 basis points on the day. It moved in a range of 8.57 percent to 8.64 percent during the session.
Traders expect bond yields to hold in a 8.55 to 8.65 percent range until the policy review on Oct. 29.
Gains in the rupee and US treasuries also helped the sentiment for bonds. The rupee gained, tracking the stock market's surge to its highest levels in nearly three years in intra-day trade.
US Treasuries yields fell to their lowest in three months on Wednesday, prompted by more bets that the Federal Reserve will not pare its bond purchase stimulus until next year in the aftermath of a disappointing jobs report on Tuesday.
In the overnight indexed swap market, the benchmark five-year swap rate closed flat at 8.23 percent while the one-year rate ended 2 bps lower at 8.40 percent.
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