India's 10-year bond at 16-month high on rate cut hopes

MUMBAI: India's benchmark 10-year bonds rose to their highest level in 16 months on Friday, as plunging global oil prices reinforced expectations of a rate cut by the central bank when it reviews monetary policy on Tuesday.

The 10-year bond yields however retreated from the 16-month low of 8.06 percent on profit-taking after cut-offs on a 10-year debt sale earlier in the day came in at higher-than-prevailing market levels.

Yields fell as much as 19 basis points on the month, while they eased 8 basis points on the week on rate cut expectations.

The benchmark 5-year interest rate swap hit an over 17-month low of 7.08 percent, while the one-year swap slumped to a 16-month low of 7.71 percent.

Both bonds and swaps are pricing in at least a 25 basis point cut in the repo rate from the Reserve Bank of India after a sharp fall in domestic consumer price inflation following global oil prices, traders said.

The next trigger will be the gross domestic product (GDP) data for July-September, due after market hours on Friday. India's Finance Minister Arun Jaitley is likely to make a strong case for a rate cut to RBI Governor Raghuram Rajan due to a likely sluggish GDP growth number of around 5 percent in September.

Since mid-October, the 10-year yield has fallen as much as 36 basis points, as consumer inflation started easing. However, a Reuters poll of 45 economists showed the central bank is likely to leave interest rates unchanged on Dec. 2.

"I believe the market is unduly aggressive and very much frontrunning a rate cut based on oil prices falling substantially thinking maybe it will give an enabler to RBI to cut rates in December instead of in February," said N.S. Venkatesh, executive director, IDBI Bank. Brent crude prices were near four-year lows after oil producers' club OPEC decided to not cut oil output.

Bonds also tracked a fall in US yields which hit their lowest in more than a month on weaker-than-expected US economic data and continuing low yields in Europe.

In the overnight indexed swaps market, the benchmark five-year swap rate closed down 9 basis points at 7.14 percent while the one-year rate ended 7 basis points lower at 7.75 percent.