MUMBAI: Indian federal bond yields fell on Thursday, while the 5-yr OIS rate slumped to its lowest this year, on hopes the central bank could cut interest rates to support growth after a sharp downward revision of industrial output data for April.
Although factory output picked up more than expected in May, bond investors focused on the April number, which was revised to a contraction of 0.9 percent from growth of 0.1 percent.
The data sparked a shift from markets that had widely expected the Reserve Bank of India to keep rates on hold at its policy review on July 31, though inflation data due out on Monday will be key in setting those expectations.
"People who look at only the headline number (output) have heaved a sigh of relief, but sequentially the number is quite bad," said Manish Wadhawan, director and head of interest rates at HSBC India.
"The next data point to look at is the inflation number," he added. "The bias has clearly moved towards a rate cut, but that is only if inflation is also softer."
The benchmark 10-year bond yield closed down 4 basis points at 8.10 percent. The most-traded 9.15 percent 2024 bond closed steady at 8.32 percent.
The impact of the shifting rate cut expectations were more pronounced in the overnight indexed swap rates.
The benchmark 5-year OIS fell 12 bps to 6.96 percent, its lowest since late December 2011.
Meanwhile, the one-year rate dropped 12 bps to 7.56 percent, its lowest since mid-June 2012.
For the rally to sustain, traders would need to see lower inflation, which not many economists expect. A Reuters poll forecasts wholesale price inflation could rise by 7.62 percent in June, which would mark a 2012 high.
Traders said headline inflation number of 7.25 percent or below and core inflation of below 4.5 percent, would help increase expectations for a rate cut by the central bank.
Total volume on the central bank's electronic trading platform was at a high 278.05 billion rupees ($5 billion).
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