MUMBAI: Indian government bonds dipped slightly on Tuesday as traders braced for the central bank’s policy decision a day later.
The yield on the benchmark 10-year bond settled at 6.3321%, compared with Monday’s close of 6.3179%, while the yield on the 6.68% 2040 bond ended at 6.6888% versus 6.6611% in previous close.
Bond yields move inversely to prices.
The spread between 10-year and 15-year bond government bond yields widened to 35 basis points during the day, the most since July 1.
“While interest rates are likely to remain lower for an extended period, the structural rally in long bonds appears to have largely played out,” strategists at Axis AMC said in a note.
“Unless India faces a significant growth shock where we see aggressive rate cuts or sees renewed momentum from inclusion in Bloomberg indices, which improves the demand-supply dynamics, we believe the scope for rally in long duration bonds is limited.”
India’s 10-year bond yield falls most in 12 weeks tracking US peers
Investors will monitor any dovish commentary or downward revisions to economic forecasts by the RBI on Wednesday, which could extend the decline in government bond yields and overnight index swap rates, even in the absence of a rate cut, treasury officials said.
Some market participants expect a 25 bp cut in the August policy, while the majority anticipate that the RBI will hold the rates steady.
“Further downside risks to growth have resurfaced amid uncertainty from the tariff hikes,” Kotak Mahindra Bank said in a note.
“While our base case remains for a 25 bps rate cut, the odds are evenly balanced given the downside risk on the INR due to the tariff uncertainties.”
Rates
India’s overnight index swap rates ended lower on Tuesday, continuing the previous day’s drop.
The one-year OIS rate ended 1 basis point lower at 5.44% and the two-year OIS rate dropped 2 bps to 5.39%. The liquid five-year OIS rate ended about 2 bps lower at 5.6375%.
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