MUMBAI: Indian bond and swap markets rallied on Tuesday after data showing consumer price inflation sharply below expectations reinforced hopes the central bank would cut interest rates at its next policy review in early February.
Data late on Monday showed India's annual consumer price inflation accelerated for the first time in five months in December to 5 percent, driven by higher food costs, but the number was sharply below expectations of a 5.4 percent annual rise predicted by analysts in a Reuters poll.
The benchmark 10-year bond rose to an 18-month high while benchmark swap rates also fell to their lowest levels in more than a year and a half.
"With the CPI coming in below market expectations, the market has mostly factored in a February rate cut into the price action seen today," said Harish Agarwal, a fixed income trader with First Rand Bank.
The benchmark 10-year bond yield was trading down 5 basis points on the day at 7.76 percent, after falling to 7.75 percent, its lowest level since July 15, 2013.
The benchmark 5-year swap rate dropped to 6.92 percent, its lowest level since June 17, 2013 while the 1-year rate also hit 7.59 percent, its lowest since July 15, 2013.
The Reserve Bank of India is due to review monetary policy on Feb. 3, but not all analysts believe the central bank will cut rates.
Some analysts say the RBI could wait until the government unveils in the last week of February its budget for the next fiscal year starting in April, before moving on rates.
Meanwhile, the rupee only saw mild gains as stocks failed to gain much.
The partially convertible rupee was trading at 62.08/09 per dollar versus its Monday's close of 62.16/17.
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