Indian bonds are poised to rally this week as some traders bet the central bank will cut a key short-term interest rate signal in a bid to discourage surging foreign investment inflows into the country.
Hopes of a cut in the repo rate - at which the central bank borrows surplus cash on a short-term basis - have strengthened after the Reserve Bank of India moved on Saturday to slow foreign inflows.
The bank lowered interest rates on deposits of overseas Indians in local banks to LIBOR from 25 basis points above LIBOR.
It also said importers' credit of up to $20 million for one to three years can be used only for capital goods imports.
The repo rate is at 4.5 percent and is essentially a short-term signal. But a cut can bring down interbank borrowing costs, bond yields, and deposit rates - making Indian fixed income investments relatively less attractive.
The key 10-year bond's yield fell to 5.0603 percent on Saturday, down five basis points over the week, and nearly 20 basis points since early March.