MUMBAI: India's benchmark federal bond yield fell to its lowest in more than two weeks after data showed sluggish factory output growth in February, adding to clamour for the first rate cut in nearly three years.
Industrial output growth in February, a notoriously volatile index, was a slower-than-expected 4.1 percent, but what surprised dealers was a sharp downward revision in the January print.
January output growth was lowered to 1.14 percent from 6.8 percent on an error in sugar production data.
That likely seals the deal for a 25-basis-point rate cut for most market participants, with a growing call for a bigger cut in the policy rate or an accompanying lowering of the cash reserve ratio.
"The yield levels across the maturity buckets rallied on account of a sharp downward revision in the January 2012 IIP (Index of Industrial Production) number resulting in an expectation of a bigger rate cut by the RBI on its forthcoming policy meet than the earlier expectation of 25 basis points," said Shakti Satapathy, a fixed income analyst with A.K.Capital Services.
Satapathy expects at least a 25 basis point cut in the repo rate and a 50 basis point cut in the cash reserve ratio next week.
A CRR cut would be needed to tame lending rates, as a repo cut would just offer momentum support to yields, he said.
The 10-year benchmark bond settled at 8.44 percent, down 11 basis points. It hit an intraday low of 8.42 percent, its lowest since March 26.
The yield has come off 30 basis points in just over a week.
Total volume on the central bank's electronic trading platform was a heavy 197.65 billion rupees ($3.84 billion).
Bond dealers will now look at another crucial piece of data - the March inflation print due on Monday - before the RBI's policy meeting on Tuesday.
India's wholesale price inflation rate likely slowed marginally in March as easing price pressures from non-food items offset persistently high food and fuel costs, a Reuters poll showed.
The negative spread between the one- and five-year OIS is likely to correct more as the receivings on the near-end are expected to rise, Satapathy said.
The negative spread has now come down to 42 basis points after rising as much as 107 basis points in September.
The benchmark five-year swap rate ended down 1 basis points at 7.53 percent and the one-year rate was 3 basis points lower at 7.95 percent respectively.
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