Yields at 27-month low on rate cut hope

Government bond yields fell with the benchmark 10-year bond yield touching a 27-month low as a lower-than-expected inflation reading for December strengthened expectations of policy rate cut from the Reserve Bank of India.

The 10-year benchmark 8.15%, 2022 bond yield fell 6 basis points to 7.8% on Monday and dealers said the bond could touch 7.75% in the run-up to the policy. The central bank will detail its third quarter policy review on January 29.

Dealers said that following the inflation number, expectations are that the RBI may cut the repo rate by a bigger margin of 50 bps.

Inflation based on wholesale price index fell to 7.18% in December from 7.24% in November. Earlier, in the month, data from the government showed that industrial output contracted 0.1% in November after rising 8.3% in October.

“The market is now pricing in a 50 bps rate cut. The single big barrier to rate cut is inflation and that is coming down,” said Vivek Mhatre, head of treasury at Union Bank of India.

The 10-year bond yield has fallen 20 bps in just two weeks on rate cut hopes.

“The question now is not whether rate cut is coming but how much is coming,” said a dealer at a foreign bank. Hopes that the government may not overshoot its borrowing plan have also lent support to bonds, dealers said.

The government recently deferred its bond auction scheduled in the week ended January 4 to a

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