MUMBAI: India's benchmark bonds rose to their highest level in over 16 months on Monday as investors drew comfort from the sustained fall in global crude oil prices while hoping for a surprise cut in interest rates by the central bank on Tuesday.
Only 4 out of 45 analysts polled by Reuters expect the Reserve Bank of India to lower interest rates at its policy review, despite the sharp decline seen in retail inflation in recent months.
Markets however, particularly debt and swaps, have been pricing in a 25-basis-points cut in rates and there is a risk of a sell-off in bonds if the central bank statement also remains elusive about rate cuts, dealers said.
In the event of a rate cut though, the 10-year yield can drop to 7.85-7.90 percent, dealers added.
"I am not expecting a cut in rates. The 10-year bond yield could settle between 8.10-8.20 percent by end of day tomorrow with policy stance remaining unchanged from the previous one," said Harish Agarwal, a fixed income dealer with First Rand Bank.
"I think the statement will be dovish to the extent of mentioning the comfort over falling crude but there isn't likely to be any guidance on rates," he added.
The benchmark 10-year bond yield ended down 3 basis points at 8.06 percent. The yield dropped as low as 8.04 percent, its lowest level since July 30, 2013.
The fall in global crude oil prices aided sentiment for debt and will continue to be monitored for direction.
Brent crude oil fell more than $2 a barrel to a five-year low below $68 on Monday as investors looked for a price floor after last week's OPEC decision not to cut production.
In the overnight indexed swap market, the benchmark 5-year rate closed up 2 basis points at 7.16 percent while the one-year rate ended unchanged at 7.75 percent.
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